Growth-Effects of Inflation Targeting: The Role of Financial
Sector Development

Rangan Gupta

The paper develops a dynamic general equilibrium monetary endogenous growth model. The closed economy model is inhabited by consumers, firms, a Cournotian monopolistically competitive banking system, besides, an inflation targeting monetary authority, and, in turn, analyzes the effect of a tight monetary (disinflationary) policy on growth. We show that the effect of a lower inflation target on growth is ambiguous, with the ultimate effect depending on the initial levels of growth and the individual bank size, besides, a whole host of structural parameters defining the preferences and the production structure of the economy.

Key Words: Inflation Targeting; Economic Growth; Financial Sector Development.
JEL Classification Numbers: E31, E44, E52.