Hostname: page-component-cd9895bd7-jn8rn Total loading time: 0 Render date: 2024-12-23T06:11:37.087Z Has data issue: false hasContentIssue false
  • English
  • Français

MONETARY POLICY, FACTOR SUBSTITUTION, AND CONVERGENCE

Published online by Cambridge University Press:  03 August 2016

Rainer Klump  and
Anne Jurkat
Rainer Klump*
Affiliation:
University of Luxembourg
Anne Jurkat
Affiliation:
Goethe University Frankfurt
*
Address correspondence to: Rainer Klump, University of Luxembourg, 162a, Avenue de la Faiencerie, L-1511 Luxembourg, Luxembourg, and CFS-SAFE, House of Finance, Theodor-W.-Adorno-Platz 3, 60353 Frankfurt am Main, Germany; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper, we examine the influence of monetary policy on the speed of convergence in a standard monetary growth model à la Sidrauski allowing for differences in the elasticity of substitution between factors of production. The respective changes in the rate of convergence and its sensitivities to the central model parameters are derived both analytically and numerically. By normalizing the constant elasticity of substitution (CES) production functions both outside the steady state and within the steady state, it is possible to distinguish between an efficiency and a distribution effect of a change in the elasticity of substitution. We show that monetary policy is the more effective, the lower is the elasticity of substitution, and that the impact of monetary policy on the speed of convergence is mainly channeled via the efficiency effect.

Keywords

Monetary Growth ModelsElasticity of SubstitutionNormalized CES Production FunctionsSpeed of Convergence
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Special Issue 1: Current Macroeconomic Challenges , January 2018 , pp. 63 - 76
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Antrás, Pol (2004) Is the US Aggregate production function Cobb–Douglas? New estimates of the elasticity of substitution. Contributions to Macroeconomics 4 (1), 1–33.Google Scholar
Arrow, J. Kenneth, Chenery, Hollis B., Minhas, Bagicha Singh, and Solow, Robert Merton (1961) Capital-labor substitution and economic efficiency. Review of Economics and Statistics 43, 225–250.Google Scholar
Barro, J. Robert and Sala-i-Martin, Xavier (1992) Convergence. Journal of Political Economy 100, 223–251.Google Scholar
Caselli, Francesco, Esquivel, Gerardo, and Lefort, Fernando (1996) Reopening the convergence debate: A new look at cross-country empirics. Journal of Economic Growth 1, 263–390.Google Scholar
Cohen, Daniel (1985) Inflation, wealth, and interest rates in an intertemporal optimizing model. Journal of Monetary Economics 16, 73–85.Google Scholar
De LaGrandville, Oliver (1989) In quest of the Slutzky diamond. American Economic Review 79, 468–481.Google Scholar
Fischer, Stanley (1979) Capital accumulation on the transition path in a monetary optimizing model. Econometrica 47, 1433–1439.Google Scholar
Gokan, Yoichi (2003) The speed of convergence and alternative government financing. Journal of Economic Dynamics and Control 27, 1517–1531.Google Scholar
Islam, Nazrul (1995) Growth empirics: A panel data approach. Quarterly Journal of Economics 110, 1127–1170.Google Scholar
Klump, Rainer (2001) Trade, money, and employment in intertemporal optimizing models of growth. Journal of International Trade and Economic Development 10, 411–428.Google Scholar
Klump, Rainer and de LaGrandville, Oliver (2000) Economic growth and the elasticity of substitution: Two theorems and some suggestions. American Economic Review 90, 282–291.Google Scholar
Klump, Rainer, McAdam, Peter, and Willman, Alpo (2007) Factor substitution and factor-augmenting technical progress in the United States: a normalized supply-side system approach. Review of Economics and Statistics 89, 183–192.CrossRefGoogle Scholar
Klump, Rainer, McAdam, Peter, and Willman, Alpo (2012) The normalized CES production function: Theory and empirics. Journal of Economic Surveys 26, 769–799.Google Scholar
Klump, Rainer and Preissler, Harald (2000) CES production functions and economic growth. Scandinavian Journal of Economics 102, 41–56.Google Scholar
Klump, Rainer and Saam, Marianne (2008) Calibration of normalized CES production functions in dynamic models. Economic Letters 98, 256–259.Google Scholar
Mankiw, N. Gregory, Romer, David, and Weil, David N. (1992) A contribution to the empirics of economic growth. Quarterly Journal of Economics 107, 407–438.Google Scholar
Saam, Marianne (2008) Openness to trade as a determinant of the macroeconomic elasticity of substitution. Journal of Macroeconomics 30, 691–702.CrossRefGoogle Scholar
Sidrauski, Miguel (1967) Rational choice and patterns of growth in a monetary economy. American Economic Review 57, 534–544.Google Scholar
Temple, Jonathan R. W. (1998) Robustness tests of the augmented Solow model. Journal of Applied Econometrics 13, 361–375.Google Scholar
Turnovsky, J. Stephen (2002) Intertemporal and intratemporal substitution, and the speed of convergence in the neoclassical growth model. Journal of Economic Dynamics & Control 26, 1765–1785.Google Scholar
Xue, Jianpo and Yip, Chong K. (2012) Factor substitution and economic growth: A unified approach. Macroeconomic Dynamics 16, 625–656.Google Scholar