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Modeling the inflation-growth effect

Gillman, Max and Kejak, Michal 2000. Modeling the inflation-growth effect. [Working Paper]. CEU Economics Department working papers, vol. 7/2000. Budapest: Central European University. Economics Department.

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This paper adds a credit services sector into a monetary endogenous growth economy in order to investigate the inflation-growth effect. We compare this economy to more standard models with respect to the effect of the money / credit exchange technology. We find a markedly negative effect of inflation on economic growth using very standard calibration parameters. Resulting estimates are within or close to the range reported in the literature, depending on the credit technology. Analytically the model employs a general equilibrium version of the Tobin-type substitution in the face of higher inflation that manifests as an increase in the effective capital to effective labor ratios across each of the sectors. An realistic large fall in growth results because of the combination of Lucas (1988) endogenous growth, in which more leisure time implies directly lower growth, and a capital intensive credit technology that induces resource reallocation across sectors so as to avoid the inflation tax.

Item Type: Monograph (Working Paper)
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Uncontrolled Keywords: Inflation; growth; Tobin-effect; credit-technology
Publisher: Central European University. Economics Department
Last Modified: 19 Mar 2016 23:14

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