## Growth and the Effects of InflationIn this paper, we analyze the effects of changes in monetary growth rates in the context of models of endogenous growth when the demand for money comes from a cash-in-advance constraint. We explore two alternative avenues through which the rate of inflation could affect the overall long-run rate of growth of the economy. The first of these is through nominal rigidities in the tax code. The particular rigidity that we examine is for depreciation allowances that are fixed in nominal terms. The second avenue that we examine is a distortion of the labor-leisure choice when a Lucas-style model of effective labor is used. In both cases, the welfare costs and growth effects of various monetary growth rules relative to a constant money supply are studied. It is found that both the welfare costs of inflation and its growth effects are quite small at low to moderate levels of inflation. However, at rates of inflation that are high by U.S. standards but not uncommon in developing countries, the magnitude of both the growth effects and the welfare costs of inflation depend on the specification of the model. If cash and credit goods are substitutes there are no growth effects and moderate welfare effects. If the two goods are complements there are sizable growth effects and large welfare effects. |

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advance constraint Alex Kane asymptotic Bureau of Economic calculations capital stock cash and credit cash-in-advance constraint ceteris paribus changes in monetary complements demand for money denominated depreciation allowances distortion economy effective labor technology effects of inflation effects of monetary effects on growth elasticity of substitution endogenous growth equation Exchange Rates explore fiscal policy Fixed Exchange Rates follows given gives rise growth and welfare growth effects hence human capital increase inflation affects Jones and Manuelli Markusen Thomas model of endogenous model of section monetary expansion monetary policy money growth money supply NBER Working Paper nominal interest rate nominally denominated depreciation Number optimal policy Partial Subscription physical capital purchases rate of growth rate of inflation rate of monetary rate of money Rebelo sector model simple model solution to 20 steady state growth substitution between cash tax code tax rate taxation welfare effects welfare loss zero