Journal &of Development Economics 2 (1975) 33-48. 0 North-Holland Publishing Company MONEY AS -4 MEDIUM OF EXCHANGE AND MONETARY GROWTH IN AN UNDERDEVELOPMENT CONTEXT Basant K. KAPUR* Stanford University, Stanford, Cal& U.S.A. and University of Singa>vore, Singapore 10, Singapore Revised version received October I974 This paper constructs a neoclassical monetary growth model applicable to less developed economies, in that (1) the economy is assumed to be labour-surplus (as a result of which its steady-state growth rate is an endogenous variable), and (2) differential savings propensities on the part of profit- and wage-earners are postulated. The model predicts thar an increase in the rate of monetary expansion increases the steady-state rate of inflation, increases the capital-labour ratio, reduces the money-labour ratio, and reduces the steady-state growth rate. Because of this last-mentioned fact, an infIationary policy is held tc be unfavourable to economic development, despite the fact that it increases the capital-labour ratio. Some implications of the analysis for the well-known ‘choice of techniques’ problem are also dis- cussed. In 1965, a significant new dimension was added to modern monetary theory with the appearance of Professor James Tobin’s paper ‘Money and Economic Growth’. Received theory up to that time had tended to focus primarily upon the nature of the short-run, macroeconomic interactions between monetary and real phenomena. Professor Tobin, however, adopted an explicitly long-run perspective: his paper sought to examine the manner in which money and monetary policy affected the steady-state, balanced growth path which a ‘stylised’ economy would follow. The analytical vehicle selected for this undertaking was the well-known neoclassical one-sector growth model originated by Professor Robert Solow (1956). In particular, two fundamental structural features of Solow’s model were carried over into Tobin’s anal;rsis. The first was the assumption that capital markets are perfect; ex ante physical savings could be costlessly transformed into investment in physical capital of uniform quality and profitability. The second was the assumption that the economy is, in the steady state, at full *The author would like to acknowledge the benefit of most helpful discussions he has had on the subject-matter of this paper with Professors RI. McKinnon, D.J. Harris, and D.K. Foley. In addition, comments on earlier drafts of this paper from Professors D. Patlnkm and D. Levhari, as well as from two anonymous referees, are most appreciated. Responsibility for the views expressed herein is, however, entirely mine.