Income and Wealth Distribution in a Monetary Growth Model

This chapter studies the relationship between money and economic growth. From empirical as well as theoretical literatures on money and growth, it is known that the relationships are ambiguous in the sense that they can be positive, independent, negative, or situation-dependent, depending on countries or periods within the same country or analytical frameworks. This chapter readdresses issues related to the interdependence between economic growth and money. But different from the most formal models in the literature of money and growth, I study the relationship between money and distribution between heterogeneous households. If money is not neutral, inflation policy affects economic growth. As households have various preferences for consumption and saving and varied levels of human capital, it is reasonable to expect that inflation policy should have different effects on income and wealth distribution between heterogenous households. This chapter is an integration of the core ideas in Walrasian general equilibrium theory, neoclassical growth theory, and monetary growth theory. This chapter develops the monetary growth model with endogenous wealth and capital with income and wealth distribution between heterogeneous households and analyzes properties of the model and identifies the existence of an equilibrium point. It shows the impact of changes in the inflation policy, household 1’s propensity to hold money, household 3’s human capital, group 3’s population, household 3’s propensity to save, household 3’s propensity to use leisure time, and the consumer good sector’s total factor productivity.