CAPITAL-MARKET IMPERFECTIONS IN A MONETARY GROWTH-MODEL

We consider a monetary growth model essentially identical to that of D iamond (1965) and Tirole (1985), except that we explicitly model credi t markets, a credit market friction, and an allocative function for fi nancial intermediaries. These changes yield substantially different re sults than those obtained in more standard models. In particular, if a ny monetary steady state equilibria exist, there are generally two of them; one of these has a low capital stock and output level, and it is necessarily a saddle. The other steady state has a high capital stock and output level; either it is necessarily a sink, or its stability p roperties depend on the rate of money creation. It follows that moneta ry equilibria can be indeterminate, and nonconvergence phenomena can b e observed. Increases in the rate of money creation reduce the capital stock in the high-capital-stock steady state. If the high-capital-sto ck steady state is not a sink for all rates of money growth, then incr eases in the rate of money growth can induce a Hopf bifurcation. Hence dynamical equilibria can display damped oscillation as a steady state equilibrium is approached, and limit cycles can be observed as well. In addition, in the latter case, high enough rates of inflation induce the kinds of ''crises'' noted by Bruno and Easterly (1995): when infl ation is too high there are no equilibrium paths approaching the high- activity steady state.