Short-Term Credit: A Monetary Channel Linking Finance to Growth

43 Pages Posted: 22 Aug 2013

See all articles by Carolyn Sissoko

Carolyn Sissoko

University of the West of England (UWE)

Date Written: June 12, 2006

Abstract

This paper develops a mechanism that links the combined monetary and financial role of intermediaries to the division of labor and endogenous growth. The model builds on an augmented Ramsey Cass Koopmans (RCK) model of optimal growth. First, by relaxing the assumption that each agent buys and sells at the same time an endogenous cash-in-advance constraint is created. The cash constraint is not binding for agents who borrow from intermediaries at the start of a period and repay the debt at the end of the period. Thus intermediated short-term credit is a solution to the monetary friction. Second to address the division of labor the symmetric n-good n-type structure of Kiyotaki and Wright’s search model of money is nested into each period of the model. Because each type of agent is more productive when his production is specialized, relaxing the cash constraint leads to a division of labor. Finally the exogenous growth of the RCK model is reinterpreted as endogenous growth due to a process of learning-by-doing. We find that financial intermediaries by relaxing the cash constraint promote the division of labor which generates a process of endogenous growth.

Suggested Citation

Sissoko, Carolyn, Short-Term Credit: A Monetary Channel Linking Finance to Growth (June 12, 2006). Available at SSRN: https://ssrn.com/abstract=2314509 or http://dx.doi.org/10.2139/ssrn.2314509

Carolyn Sissoko (Contact Author)

University of the West of England (UWE) ( email )

Blackberry Hill Bristol
Bristol, Avon BS16 1QY
United Kingdom

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