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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: rainer.klump@uni.lu.
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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 

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