Liquidity effects and the welfare costs of inflation in an endogenous growth model
AbstractThe paper has two subjects. The first subject is the development of a monetary general equilibrium model with endogenous growth. By combining the two-sector endogenous growth model and the limited participation approach, the model is able to explain the empirically observed liquidity effect of an expansionary monetary policy. The second subject is the effect of inflation on growth and economic welfare. It is shown that the traditional approach to measure the welfare costs of inflation may be misleading: It ignores the costs or benefits of the transition to the new steady state. This omission may bias estimates of the total welfare gains to be achieved by reducing inflation and of the optimal degree of disinflation. It is also argued that, once the transition is taken into account, the welfare gains of lowering inflation depend on the monetary policy rule and the fiscal response to disinflation. The two themes of the paper are related, because if the welfare costs of inflation cannot ignore the transitional dynamics, then simulating disinflation processes requires models with sensible short run properties.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 607.
Date of creation: 2000
Date of revision:
Monetary general equilibrium model; endogenous growth; welfare costs of inflation; monetary transmission; liquidity effects;
Find related papers by JEL classification:
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
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