Growth and Trade Pattern in a Monetary Two-Country Heterogeneous Households Growth Model

Abstract

This paper proposes a two-country monetary growth model with capital accumulation. We introduce wealth and income distribution not only between two countries but also within each country by classifying the population of each country into two groups. This study introduces money into a　two-country growth model with free trade and perfect competition. Clower (1967) proposed a model to incorporate the role of money as a medium of exchange through the CIA constraint. The basic idea is to explain the role that money plays in carrying out transactions by introducing transaction technology. Stockman (1981) developed a growth model through CIA constraints. The model predicts that there is long-run superneutrality if only consumption expenditures are subject to a CIA constraint. If investment is also subject to a CIA constraint then steady state capital will fall when the growth rate of money rises. Marquis and Reffet (1991) and Mino and Shibata (1995) also introduce money into two-sector models involving human capital via a cash-in-advance constraint. As far as the role of money is concerned, this study follows the CIA approach. The real aspects of the model are influenced by the neoclassical trade theory with capital accumulation. Since the publication of Oniki and Uzawa’s paper on theory of trade and economic growth (Oniki and Uzawa, 1965), various trade models with endogenous capital have been proposed. After defining the model, we show that the dynamics of the world economy can be described by  differential equations. Then, we simulate equilibrium with Cobb-Douglas production functions. We also demonstrate effects of changes in technology and inflation policy. Our simulation results demonstrate, for instance, when the more developed economy increases its inflation policy, the equilibrium values of the global output, wealth and consumption are increased, the rate of interest is reduced; the capital intensities, output levels per worker, total output, total capital employed are all increased; in the more developed economy, its trade balance is improved, its average real money and total wealth, the two groups’ real money, wealth and consumption per household are all increased; but in the less developed economy, its trade balance is deteriorated, its average real money and total wealth, the two groups’ real money, wealth and consumption per household are all reduced.