Monetary Policy in a Small Open Economy with Credit Goods Production

High inflation countries experience a dramatic expansion of their financial sector and declining growth rates. This provides indirect evidence that monetary policy does indeed affect the real sector of an economy in the long run, invalidating the classical dichotomy. In stark contrast to these observations, the results obtained from standard monetary models, where the demand for money is based either on cash-in-advance constraints or money in the utility function, usually find that...
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High inflation countries experience a dramatic expansion of their financial sector and declining growth rates. This provides indirect evidence that monetary policy does indeed affect the real sector of an economy in the long run, invalidating the classical dichotomy. In stark contrast to these observations, the results obtained from standard monetary models, where the demand for money is based either on cash-in-advance constraints or money in the utility function, usually find that monetary policy has a modest role influencing the long run behavior of the economy.