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The effects of monetary policy at different stages of economic development

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  • Reed, Robert R.
  • Ghossoub, Edgar A.

Abstract

The effects of monetary policy vary significantly across countries. In particular, recent empirical work finds evidence of a Tobin effect in high income countries and a reverse Tobin effect in less developed economies. We present a neoclassical growth model where money is required for investment and consumption purposes. In contrast to standard cash-in-advance models, the reliance on cash is inversely related to the extent of capital formation. In this setting, we demonstrate that the effects of monetary policy depend on the level of development. In particular, inflation adversely affects capital formation at low levels of income because there is a high reliance on cash and a high cost of capital. By comparison, the financial system operates more efficiently in advanced countries. Consequently, monetary policy generates a Tobin effect.

Suggested Citation

  • Reed, Robert R. & Ghossoub, Edgar A., 2012. "The effects of monetary policy at different stages of economic development," Economics Letters, Elsevier, vol. 117(1), pages 138-141.
    • Handle: RePEc:eee:ecolet:v:117:y:2012:i:1:p:138-141
    DOI: 10.1016/j.econlet.2012.04.108
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    Cited by:

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    2. Robert R. Reed & Edgar A. Ghossoub, 2013. "Thresholds and the Welfare Cost of Inflation," Working Papers 0186eco, College of Business, University of Texas at San Antonio.
    3. Ghossoub, Edgar A. & Reed, Robert R., 2017. "Financial development, income inequality, and the redistributive effects of monetary policy," Journal of Development Economics, Elsevier, vol. 126(C), pages 167-189.

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    More about this item

    Keywords

    Economic development; Financial development; Monetary policy; Inflation;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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