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Munich Personal RePEc Archive

On Monetary Policy, Unemployment, and Economic Growth

Rosas-Martinez, Victor H.

19 January 2016

Online at https://mpra.ub.uni-muenchen.de/70980/

MPRA Paper No. 70980, posted 28 Apr 2016 01:41 UTC

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On Monetary Policy,

Unemployment, and Economic Growth

Víctor Rosas-Martínez victor.rosas@unisi.it

Abstract

Recognizing the possible relation between investments, eco- nomic growth and unemployment, and how there is not an es- tablished impact of an unlikely productive project failure on the secondly mentioned variables, we address such relation and asses theoretically the e¤ect of di¤erent instruments of monetary pol- icy on the mentioned macroeconomic indicators. To do this we modify two models of economic growth by considering the role of entrepreneurs, risk takers, and a monetary authority which is the average agent of the economy that is assumed to be aware of how the in‡ation can damage equally the individuals’ life style, independently of their particular levels of income, …nding that the impact of the monetary instruments depends on the behavior of the population.

Keywords: Monetary Authority, Endogenous expansive policy, In‡a- tion, Unemployment, Economic Growth.

JEL: E5, E2, O3, O4

1 Introduction

Why are the macroeconomic indicators important? Why are some goods more expensive in more developed regions? Why is there unemployment?

Why is there poverty? Are the poor always unemployed? Are the unem- ployed always poor? Is unemployment always voluntary? Which is the relation between the aggregate investments and the unemployment in

I want to thank Lionello Franco Punzo, Elvio Accinelli Gamba and Carlos Herves Beloso for their incredible support and helpful comments, which made possible to entrepreneur this working paper.

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the short run? How could the in‡ation a¤ect the life style of the individ- uals? Would the individuals with low incomes be a¤ected equally by high in‡ation levels? After addressing these questions, we consider important the study of economic growth, and the emphasis on the understanding of the short run relations which involve variables like unemployment and in‡ation.

The relevance of economic growth, in‡ation, and unemployment on the life style of the individuals has motivated many authors who looked for establishing a commitment between these variables. Among the mak- ers of theories which concern these indicators we …nd famous authors like J. M. Keynes (1883-1975), or A. W. Phillips (1914-1975).

More recently there were also important works which could be consid- ered relevant in the understanding of the relation between the mentioned variables. Bernanke and Mihov (1998) developed a model-based method- ology for measuring innovations in monetary policy and their macroeco- nomic e¤ects, and proposed a new measure of the overall stance of policy.

Boivin and Giannoni (2006) investigate the implications of changes in the structure of the U.S. economy for monetary policy, and …nd that responding more strongly to in‡ation expectations, monetary policy has stabilized the economy more e¤ectively in the post 1980 period which seems to contradict the …ndings of Kuttner and Mosser (2002) about how monetary policy e¤ects appear to be somewhat weaker than they were in past decades.

Unlike Chen (2007) who …nds that empirical evidence suggests that monetary policy has larger e¤ects on stock returns in bear markets, also showing how contractionary monetary policy leads to a higher probabil- ity of switching to the bear-market regime, in the present work, we look for pointing out under which conditions the policies of the monetary authority can be e¤ective in increasing economic growth, and in reduc- ing unemployment, which shall takes us to highlight the importance of entrepreneurs and risk takers in a decentralized economy. Furthermore, our …ndings can be considered as an accurate background for the posi- tive relationship between bank credits and the …rms productivity which is found by Villalpando B. (2015).1

The work is composed by three parts: The …rst part deals with the relationship between monetary policy and economic growth, and the second part addresses the relationship between monetary policy and un- employment. Both of these parts consider how in‡ation can arise as a consequence of the actions taken by the monetary authority. Finally the third part concludes.

1Barro and Sala-i-Martin (2004) …nd a positive correlation between the share of investments and economic growth.

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2 Some general settings of the models

Although some general assumptions and explanations which are usually done in the development of mathematical models of economic growth may not be so necessary to be mentioned, and could be taken for granted, we shall repeat them in the following.

We assume that the economy is closed. We accept that all the …- nal product …rms produce under perfect competition, and that supply is always equal to demand. The relative prices of the …nal products are given by the composition of the total output. Moreover, it may result important to mention that the second part will be developed under the assumption of each unit of capital being equally productive indepen- dently of the moment of its investment.

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References

[1] Ackert, Lucy F., Charupat, Narat, Deaves, Richard and Kluger, Brian D. (2009). “Probability Judgment Error and Speculation in Laboratory Asset Market Bubbles”. The Journal of Financial and Quantitative Analysis, 44, June, 719-744.

[2] Barro, Robert J., and Sala-i-Martin (2004). Economic Growth. 2nd ed. Cambridge, Ma: MIT Press.

[3] Bernanke, Ben S., and Mihov, Ilian (1998). “Measuring Monetary Policy”. The Quarterly Journal of Economics, 113, August, 869-902.

[4] Boivin, Jean, and Giannoni, Marc P. (2006). “Has Monetary Policy Become More E¤ective?”. The Review of Economics and Statistics, 88, August, 445-462.

[5] Chen, Shiu-Sheng (2007). “Does Monetary Policy Have Asymmetric E¤ects on Stock Returns?”. Journal of Money, Credit and Banking, 39, April, 667-688.

[6] Kuttner, Kenneth N., and Mosser, Patricia C. (2002). “The Mon- etary Transmission Mechanism: Some Answers and Further Ques- tions”. Economic Policy Review, 8, 15-26.

[7] Petri, Fabio (2013). “Blaug Versus Garegnani on the ‘Formalist Rev- olution’ and the Evolution of Neoclassical Capital Theory”. Journal of the History of Economic Thought, 36, December, 455-478.

[8] Solow, Robert M. (1956). “A Contribution to the Theory of Economic Growth”. Quarterly Journal of Economics, 70, February, 65-94.

[9] Villalpando B. Mario (2015). “Bank Credit and Productivity: Evi- dence from Mexican Firms”. Working Paper no. 2015-06, Banco de México.

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