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Growth-Effects of Inflation Targeting: The Role of Financial Sector Development

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  • Rangan Gupta

    (Department of Economics, University of Pretoria)

Abstract

The paper develops a dynamic general equilibrium monetary endogenous growth model. The closed economy model is inhabited by consumers, firms, a Cournotian monopolistically compet- itive banking system, besides, an inflation-targeting monetary authority, and, in turn, analyzes the effect of a tight monetary (disinflationary) policy on growth. We show that the effect of a lower inflation target on growth is ambiguous, with the ultimate effect depending on the initial levels of growth and the individual bank size, besides, a whole host of structural parameters defining the preferences and the production structure of the economy.

Suggested Citation

  • Rangan Gupta, 2006. "Growth-Effects of Inflation Targeting: The Role of Financial Sector Development," Working Papers 200610, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:200610
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    References listed on IDEAS

    as
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    6. Laurence M. Ball & Niamh Sheridan, 2004. "Does Inflation Targeting Matter?," NBER Chapters, in: The Inflation-Targeting Debate, pages 249-276, National Bureau of Economic Research, Inc.
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    9. Frederic S. Mishkin, 2004. "Can Inflation Targeting Work in Emerging Market Countries?," NBER Working Papers 10646, National Bureau of Economic Research, Inc.
    10. Marc Lavoie, 2006. "A Post‐Keynesian Amendment To The New Consensus On Monetary Policy," Metroeconomica, Wiley Blackwell, vol. 57(2), pages 165-192, May.
    11. Manfred J. M. Neumann & Jurgen Von Hagen, 2002. "Does inflation targeting matter?," Review, Federal Reserve Bank of St. Louis, vol. 84(Jul), pages 127-148.
    12. Mishkin, Frederic S., 2001. "From monetary targeting to inflation targeting : lessons from the industrialized countries," Policy Research Working Paper Series 2684, The World Bank.
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    14. Marco Vega & Diego Winkelried, 2005. "Inflation Targeting and Inflation Behavior: A Successful Story?," International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
    15. Nicholas Apergis & Stephen M. Miller & Alexandros Panethimitakis & Athanassios Vamvakidis, 2005. "Inflation Targeting and Output Growth: Evidence from Aggregate European Data," Working papers 2005-06, University of Connecticut, Department of Economics.
    16. Mollick, André Varella & Cabral, René & Carneiro, Francisco G., 2011. "Does inflation targeting matter for output growth? Evidence from industrial and emerging economies," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 537-551, July.
    17. Gilberto Libanio, 2005. ""Good governance" in monetary policy and the negative real effects of inflation targeting in developing economies," Textos para Discussão Cedeplar-UFMG td277, Cedeplar, Universidade Federal de Minas Gerais.
    18. Rangan Gupta & Josine Uwilingiye, 2010. "Evaluating the Welfare Cost of Inflation in a Monetary Endogenous Growth General Equilibrium Model: The Case of South Africa," Working Papers 201002, University of Pretoria, Department of Economics.
    19. WenShwo Fang & Stephen M. Miller & ChunShen Lee, 2009. "Inflation Targeting Evaluation: Short-run Costs and Long-run Irrelevance," Working Papers 0920, University of Nevada, Las Vegas , Department of Economics.
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    Cited by:

    1. Mollick, André Varella & Cabral, René & Carneiro, Francisco G., 2011. "Does inflation targeting matter for output growth? Evidence from industrial and emerging economies," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 537-551, July.
    2. Rangan Gupta & Philton Makena, 2020. "Growth Dynamics, Multiple Equilibria, and Local Indeterminacy in an Endogenous Growth Model of Money, Banking and Inflation Targeting," Economies, MDPI, vol. 8(1), pages 1-14, March.
    3. Wang, Chan, 2012. "A very preliminary survey on growth and development," MPRA Paper 39037, University Library of Munich, Germany.

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    More about this item

    Keywords

    Inflation Targeting; economic growth; financial sector development;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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