Essays on Monetary Policy and Economic Growth

Abstract

This thesis consists of three essays concerning money supply growth, one of the main objectives in monetary policy, and economic growth. The aim of this work is to investigate the role of money in monetary policy and how money supply and seigniorage impact on output growth. The findings are derived from theoretical models and modern econometric techniques.

First of all, I shall evaluate the role of money in the conduct of monetary policy in South Korea. This research analyses the effect of monetary aggregates on prices and output and examines its transmission mechanism using recursive and non-recursive vector autoregressive models. The expansionary monetary policy shocks have substantial effects on output. Specific channels of the transmission operate through the effects which monetary aggregates have on banking lending, stock prices, exchange rates and investment, export, and government consumption.

Then, a cash-in-advanced model and human capital based endogenous growth model is developed. Through employing Bayesian maximum likelihood estimation, a positive money shock is created leading to an increase in seigniorage, which also has a positive impact on output growth. This is because there is a growth-enhancing effect from human capital production since seigniorage is spent by a government on public education. I shall show that money within the model also generates a connection between seigniorage and inflation.

However, in the long run, the theoretical model also captures the adverse effect of seigniorage due to inflation so that I shall examine the existence of threshold effects between seigniorage and growth in developing countries using Hansen (1999)’s panel threshold methodology. The threshold level of seigniorage above which seigniorage significantly slows output growth is set at 2.27%.

This thesis confirms that money supply and seigniorage have a substantial impact on output so that money is an important factor to be considered in the architecture of macroeconomic policy.