Monetary Growth Theory

Abstract

The neoclassical growth models that we studied in Chapter 3 are models of a nonmonetary economy. In this chapter, we review monetary versions of neoclassical growth theory. This involves putting money in the models of neoclassical growth theory and studying the implications for monetary policy. We begin with James Tobin (1965) who, as Orphanides and Solow (1990, p. 224) put it,

“... asked the question that has mainly preoccupied the literature ever since 1965. Different long-run rates of growth of the money supply will certainly be reflected eventually in different rates of inflation; but will there be any real effects in the long-run? Tobin studied this (“superneutrality”) question in a simple “descriptive” model with aggregate saving depending only on current income, and seigniorage distributed in such a way as to preclude any distributional effects. He found that faster money growth is associated with higher capital stock and output per person in the steady state.”