Content introduction：

No. E2018007

 

Convergence, Financial Development, and Policy Analysis?

Justin Yifu Lin, Jianjun Miao, Pengfei Wang

 

Abstract

We study the relationship among inflation, economic growth, and financial development in a Schumpeterian overlapping-generations model with credit constraints. In the baseline case money is super-neutral. When the financial development exceeds some critical level, the economy catches up and then converges to the growth rate of the world technology frontier. Otherwise, the economy converges to a poverty trap with a growth rate lower than the frontier and with inflation decreasing with the level of financial development. We then study efficient allocation and identify the sources of inefficiency in a market equilibrium. We show that a particular combination of monetary and fiscal policies can make a market equilibrium attain the efficient allocation.

 

Key words: Economic Growth, Innovation, Credit Constraints, Convergence, Policy Analysis, Money, Inflation

 

JEL Classifications codes: O11, O23, O31, O33, O38, O42