國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
rate, the inflation rate, and the nominal interest rate are τ∗ =1−1/[α(1−θ)]<0 , 1
] / ) [(
)]}
( /[
{ + − + ( )/(1 )−
= + +− −
∗ β α η β η β ρ η β ε η β
π A A , and R~* ={β/[α(η+β)]}−1≥0 , respectively. The economic intuition regarding the mix of second-best policies can be easily understood from both Proposition 6 and Proposition 8, and we thus do not repeat it here.
2.6. Concluding remarks
This chapter sets out a monetary endogenous growth model in which the intermediate goods market is imperfectly competitive, the production of intermediate goods is subject to both capital and labor externalities, and the monetary authority implements inflation targeting as a monetary rule. We then use the model to examine the possible consequence of adjusting the anchor of inflation targeting on economic growth and welfare from both the positive and normative aspects.
From the positive aspect, it is found that, due to the possibility of local indeterminacy, a higher anchor of the inflation rate may either boost or deter the level of employment and the balanced economic growth rate. From the normative aspect, in a departure from the existing studies dealing with the optimality of the Friedman rule via the implementation of the monetary growth rate, this chapter instead analyzes the optimality of the Friedman rule via the implementation of inflation targeting. Several important findings regarding the normative (welfare) analysis emerge from our analysis. First, in a Walrasian market-clearing economy without any distortion, the second-best policy for the income tax rate is zero and the second-best policy for the anchor of the inflation rate is selected to validate the Friedman rule of a zero nominal interest rate. Second, in the face of market imperfections, a uniform subsidy on labor and capital income can completely remedy the monopoly inefficiency, and the optimal anchor of
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
inflation targeting is selected to satisfy the Friedman rule. Third, in the face of a learning-by-doing capital externality, the sole income tax rate cannot completely correct the distortion from the capital externality; the inflation targeting that violates the Friedman rule should be adopted as a complementary instrument to achieve the second-best optimum. Fourth, in the face of a learning-by-doing labor externality, to correct the unduly low level of employment, the monetary authority will select the anchor of inflation targeting that leads the nominal interest rate to deviate from the Friedman rule. Fifth, when both labor and capital externalities are present at the same time, the second-best policy for the income tax rate is negative and the second-best policy for the inflation rate may be selected to deviate from the Friedman rule.
‧
equations (2.19a) and (2.19b), we can infer the following results:~ 0
From equations (2.26a) and (2.26b), we can infer the following:
τ
‧
Substituting (2.23a), (2.23c), (2.23d), (2.23f), (2.27a), (2.27b), (2.28b), (2.29b), (B4), (B5), and (B6) into equations (B1), (B2) and (B3), we obtain the following expressions:
{
+ +Θ + − + −Ψ}
Equations (B7)-(B9) are identical to equations (2.30a)-(2.30c) in the main text, respectively.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
References
Ball, L., and Sheridan, N., 2003. Does inflation targeting matter? NBER Working Paper No.
9577.
Barro, R., and Sala-i-Martin, X., 1995. Economic Growth. New York: McGraw-Hill.
Benhabib, J., and Farmer, R., 1994. Indeterminacy and increasing returns. Journal of Economic Theory 63, 19-41.
Bernanke, B., and Woodford, M., 2005. The Inflation-Targeting Debate. Chicago: University of Chicago Press.
Blanchard, O., and Kiyotaki, N., 1987. Monopolistic competition and the effects of aggregate demand,” American Economic Review 77, 647-666.
Buiter, W., 1984. Saddlepoint problems in continuous time rational expectations models: A general method and some macroeconomic examples. Econometrica 52, 665-680.
Burmeister, E., 1980. On some conceptual issues in rational expectations modeling. Journal of Money, Credit, and Banking 12, 800-816.
Chang, W., and Lai, C., 2001. Anticipated inflation in a monetary economy with endogenous growth. Economica 67, 399-417.
Correia, I., and Teles, P., 1999. The optimal inflation tax. Review of Economic Dynamics 2, 325-346.
Cunha, A., 2008. The optimality of the Friedman rule when some distorting taxes are exogenous.
Economic Theory 35, 267-291.
Devereux, M., Head, A., and Lapham, B., 2000. Government spending and welfare with returns to specialization. Scandinavian Journal of Economics 102, 547-561.
Dixit, A., and Stiglitz, J., 1977. Monopolistic competition and optimum product diversity.
American Economic Review 67, 297-308.
Dixon, H., 1987. A simple model of imperfect competition with Walrasian features. Oxford Economic Papers 39, 134-160.
Farmer, R, and Guo, J., 1994. Real business cycles and the animal spirits hypothesis. Journal of Economic Theory 63, 42-73.
Friedman, M., 1969. The optimum quantity of money and other essays. London: Macmillan.
Gersbach, H., and Hahn, V., 2006. Signaling and commitment: monetary versus inflation targeting. Macroeconomic Dynamics 10, 595-624.
Gliksberg, B., 2009. Monetary policy and multiple equilibria with constrained investment and externalities. Economic Theory 41, 443-463.
Golinelli, R., and Rovelli, R., 2005. Monetary policy transmission, interest rate rules and
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
inflation targeting in three transition countries. Journal of Banking and Finance 29, 183-201.
Gomme, P., 1993. Money and growth revisited: Measuring the costs of inflation in an endogenous growth model. Journal of Monetary Economics 32, 51-77.
Guidotti, P., and Végh, C., 1993. The optimal inflation tax when money reduces transactions costs: A reconsideration. Journal of Monetary Economics 31, 189-205.
Guo, J., and Lansing, K., 1998. Indeterminacy and stabilization policy. Journal of Economic Theory 82, 481-490.
Guo, J., and Lansing, K., 1999. Optimal taxation of capital income with imperfectly competitive product markets. Journal of Economic Dynamics and Control 23, 967-995.
Gylfason, T., and Herbertsson, T., 2001. Does inflation matter for growth? Japan and the World Economy 13, 405-428.
Heijdra, B., and van der Ploeg, F., 1996. Keynesian multipliers and the cost of public funds under monopolistic competition. Economic Journal 106, 1284-1296.
Ho, W., Zeng I., and Zhang, J., 2007. Inflation taxation and welfare with externality and leisure.
Journal of Money, Credit, and Banking 39, 105-131.
Ireland, P., 2003. Implementing the Friedman rule. Review of Economic Dynamics 6, 120-134.
Itaya, J., and Mino, K., 2003. Inflation, transaction costs and indeterminacy in monetary economics with endogenous growth. Economica 70, 451-470.
Jha, S., Wang P., and Yip, C., 2002. Dynamics in a transactions-based monetary growth model.
Journal of Economic Dynamics and Control 26, 611-635.
Lai, C., and Chin, C., 2010. (In)determinacy, increasing returns, and the optimality of the Friedman rule in an endogenously growing open economy. Economic Theory 44, 69-100.
Lucas, R., 1980. Equilibrium in a pure currency economy. Economic Inquiry 18, 203-220.
Mankiw, N., 1988. Imperfection competition and the Keynesian cross. Economics Letters 26, 7-13.
Mansoorian, A., and Mohsin, M., 2004. Monetary policy in a cash-in-advance economy:
Employment, capital accumulation, and the term structure of interest rates. Canadian Journal of Economics 37, 336-352.
Mansoorian, A., and Mohsin, M., 2006. On the employment, investment and current account effects of inflation. Journal of International Economics 70, 296-313.
Marquis, M., and Reffett, K., 1991. Real interest rates and endogenous growth in a monetary economy. Economics Letters 37, 105-109.
Meng, Q., and Yip, C., 2004. Investment, interest rate rules, and equilibrium determinacy.
Economic Theory 23, 863-878.
Miskin, F., 2000. Inflation targeting is emerging-market countries. American Economic Review
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
90, 105-109.
Romer, P., 1986. Increasing returns and long-run growth. Journal of Political Economy 94, 1002-1037.
Schmitt-Grohé, S., and Uribe, M., 2004. Optimal fiscal and monetary policy under imperfect competition. Journal of Macroeconomics 26, 183-209.
Shaw, M., Chang, J., and Lai, C., 2006. (Non)optimality of the Friedman rule and optimal taxation in a growing economy with imperfect competition. Economics Letters 90, 412-420.
Startz, R., 1989. Monopolistic competition as a foundation for Keynesian macroeconomic models. Quarterly Journal of Economics 104, 737-752.
Suen, M., and Yip, C., 2005. Superneutrality, indeterminacy and endogenous growth. Journal of Macroeconomics 27, 579-595.
Svensson, L., 1999. Inflation targeting as a monetary policy rule. Journal of Monetary Economics 43, 607-654.
Turnovsky, S., 2000. Methods of macroeconomic dynamics. Second Edition. Cambridge, MA:
MIT Press.
Wang, P., and Yip, C., 1992. Examining the long-run effect of money on economic growth.
Journal of Macroeconomics 14, 359-369.
Wen, Y., 1998. Capacity utilization under increasing returns to scale. Journal of Economic Theory 81, 7-36.
Woodford, M., 1990. The Optimum quantity of money. In: B. Friedman and F. Hahn (ed.).
Handbook of Monetary Economics 2, 1067-1152. Amsterdam: North-Holland.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
0
Figure 2.1: Phase diagram under .
0
Figure 2.2: Phase diagram under .
0
Figure 2.3: The effect of a rise in the inflation rate under .
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
0
Figure 2.4: The effect of a rise in the inflation rate under .
0
Figure 2.5: The effect of a rise in the income tax rate under .
0
Figure 2.6: The effect of a rise in the income tax rate under .