The Role of Monetary Policy in Eliminating the Non-Convergent Dynamic Paths

This paper investigates effects of money growth on the non-convergent dynamic paths in a model of money in the utility function with liquidity-in-advance. We show that the effects generally depend on the form of utility function of money. That is, when the relative risk aversion is decreasing in money, a period-doubling bifurcation is always associated with a high money supply growth. However, when the relative risk aversion is increasing in money, it is ambiguous whether it is associated with a high or low money supply growth. The paper also investigates the same problem in a "shopping costs" model. We show that the results essentially depend on the form of shopping cost function.