The effects of monetary policy at different stages of economic development

Robert Reed () and Edgar A. Ghossoub

Economics Letters, 2012, vol. 117, issue 1, 138-141

Abstract: The effects of monetary policy vary significantly across countries. In particular, recent empirical work finds evidence of a Tobin effect in high income countries and a reverse Tobin effect in less developed economies. We present a neoclassical growth model where money is required for investment and consumption purposes. In contrast to standard cash-in-advance models, the reliance on cash is inversely related to the extent of capital formation. In this setting, we demonstrate that the effects of monetary policy depend on the level of development. In particular, inflation adversely affects capital formation at low levels of income because there is a high reliance on cash and a high cost of capital. By comparison, the financial system operates more efficiently in advanced countries. Consequently, monetary policy generates a Tobin effect.

Keywords: Economic development; Financial development; Monetary policy; Inflation (search for similar items in EconPapers)
JEL-codes: E31 E41 E52 O42 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:117:y:2012:i:1:p:138-141

DOI: 10.1016/j.econlet.2012.04.108

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