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Monetary Policy and Belief-driven Fluctuation in a Small Open Economy

by Chen, Kuan-Jen

Abstract (Summary)
This thesis analyzes the connection between monetary policies and belief-driven fluctuation, and discusses the effects of monetary policies in a small open economy. We construct an endogenous growth model that introduces the role of money into the production function and allows elastic labor supply. In departing from the findings proposed by Benhabib and Farmer (1994), we find that belief-driven fluctuation can be easily encouraged, as long as there is lower increasing return to scale under money growth rate targeting. However, if there is a higher level of increasing return to scale, the increase of the growth rate of nominal money supply will only increase the economic growth rate temporarily, and money is super-neutral in the long run. More importantly, we show that under inflation rate targeting, the central bank will eliminate possibilities of belief-driven fluctuation in the small open economy, but lose the efficacy of monetary policy on the short-term economic growth at the same time.
Bibliographical Information:

Advisor:Ming-Fu Shaw; Ching-Chong Lai; Ming-Jang Weng; Shul-John Li

School:National Sun Yat-Sen University

School Location:China - Taiwan

Source Type:Master's Thesis

Keywords:money in the production function small open economy belief driven fluctuation endogenous growth indeterminacy rate targeting inflation sunspots

ISBN:

Date of Publication:07/16/2008

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