Equilibrium Dynamics in an Endogenous Growth Model of Money and Banking

Abstract

We construct an analytically tractable endogenous growth model of money and banking where money provides “liquidity services” to facilitate transactions and banks convert non‐reserve deposits into productive capital. We examine both the long‐ and short‐run effects of changes in the money growth rate or the reserve requirement ratio. In response to a change in the required reserve ratio, the inflation rate and the growth rates of capital, real balances, and consumption need not adjust monotonically along the transition path. While the balanced growth equilibrium may be either a saddle or a source locally, the global dynamical system exhibits flip bifurcation.