The Role of Monetary Policy in Eliminating Nonconvergent Dynamic Paths

This paper investigates the effects of money growth on nonconvergent dynamic paths in a money-in-utility model. When relative risk aversion is decreasing in money, period-two cycle and sunspot equilibria are always associated with a high rate of money supply growth. However, when relative risk aversion is increasing in money, it is ambiguous whether they are associated with either high or low rate of money supply growth. The paper also investigates the same problem in a transaction cost model. The author shows that the results essentially depend on the form of the transaction cost function.