Money in a Neo-Classical One-Sector Growth Model *

The neo-classical one-sector growth model has become a standard piece of equipment in the economic theorist’s tool kit. Nevertheless, most of the available expositions of it are needlessly complicated and mathematical, and tend to obscure the simplicity of the central analytical propositions. Moreover, these expositions are for the most part confined to the case of a non-monetary economy. The purpose of this essay is to present a geometrical exposition of the one-sector growth model for the simplest possible case, ¹ and to apply it to the analysis of the role of money in such a model. Section I presents the simple model. Section II indicates how relaxations of the assumptions of that model with respect to savings behaviour, the durability of capital, and technical change can be accommodated; Section III is a digression on the application of the model to various problems in the theory of economic development. Section IV applies the model to growth in a monetary economy, on alternative assumptions about the savings behaviour of the economy, with special reference to the questions of the neutrality of money in a growing economy and the capacity of monetary policy to influence economic growth.