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Inflation, factor substitution and growth

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Author Info
Rainer Klump () (Johann Wolfgang Goethe-University, Department of Economic Development and International Economics, Schumannstr. 60, 60325 Frankfurt am Main, Germany.)
Abstract

Recent empirical studies on the inflation-growth-relationship underline that inflation has negative growth effects already under relatively modest rates. Most contributions to monetary growth theory, however, have difficulties in explaining such a pattern. It is shown in this paper that this problem can be overcome by establishing a link between monetary instability and the aggregate elasticity of factor substitution. Several microeconomic justifications can be found for a negative influence of inflation on factor substitution. It turns out that already in a simple neoclassical monetary growth model this effect is usually strong enough to question the superneutrality benchmark result in the steady state and to dominate all potential positive effects of inflation along the convergence path. In a more general perspective the paper contributes to a better integration of institutional change in aggregate models of economic growth. JEL Classification: E52; O11; O41.

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Paper provided by European Central Bank in its series Working Paper Series with number 280.

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Length: 44 pages
Date of creation: Oct 2003
Date of revision:
Handle: RePEc:ecb:ecbwps:20030280

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Related research
Keywords: Monetary growth models; inflation; CES production functions; neoclassical growth; convergence.;

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  3. Temple, Jonathan, 2000. " Inflation and Growth: Stories Short and Tall," Journal of Economic Surveys, Blackwell Publishing, vol. 14(4), pages 395-426, September. [Downloadable!] (restricted)
  4. Fischer, Stanley & Sahay, Ratna & Vegh, Carlos A, 1996. "Stabilization and Growth in Transition Economies: The Early Experience," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 45-66, Spring. [Downloadable!] (restricted)
    Other versions:
  5. Stanley Fischer, 1996. "Why are central banks pursuing long-run price stability?," Proceedings, Federal Reserve Bank of Kansas City, pages 7-34. [Downloadable!]
  6. Stanley Fischer & Ratna Sahay & Carlos A. Vegh, 2002. "Modern Hyper- and High Inflations," NBER Working Papers 8930, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Ragan, Christopher, 1998. "On the Believable Benefits of Low Inflation," Working Papers 98-15, Bank of Canada. [Downloadable!]
  8. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
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  9. Costas Azariadis, 1996. "The Economics of Poverty Traps Part One: Complete Markets," Working Papers 9606, Centro de Investigacion Economica, ITAM.
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  10. Klump, Rainer & Preissler, Harald, 2000. " CES Production Functions and Economic Growth," Scandinavian Journal of Economics, Blackwell Publishing, vol. 102(1), pages 41-56, March. [Downloadable!] (restricted)
  11. Howitt, P., 1990. "Money And Growth Revisited," UWO Department of Economics Working Papers 9014, University of Western Ontario, Department of Economics.
  12. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-77, October. [Downloadable!] (restricted)
  13. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-39, November. [Downloadable!] (restricted)
  14. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Rainer Klump & Olivier de La Grandville, 2000. "Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions," American Economic Review, American Economic Association, vol. 90(1), pages 282-291, March. [Downloadable!] (restricted)
  16. Zhang, Junxi, 2000. "Inflation and Growth: Pecuniary Transactions Costs and Qualitative Equivalence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 1-12, February.
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  18. Petrucci, Alberto, 1999. "Inflation and capital accumulation in an OLG model with money in the production function," Economic Modelling, Elsevier, vol. 16(4), pages 475-487, December. [Downloadable!] (restricted)
  19. Abel, Andrew B., 1985. "Dynamic behavior of capital accumulation in a cash-in-advance model," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 55-71, July. [Downloadable!] (restricted)
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  20. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, vol. 87(2), pages 178-83, May. [Downloadable!] (restricted)
  21. Marquis, Milton H. & Reffett, Kevin L., 1991. "Real interest rates and endogenous growth in a monetary economy," Economics Letters, Elsevier, vol. 37(2), pages 105-109, October. [Downloadable!] (restricted)
  22. Rainer Klump, 2001. "Trade, money and employment in intertemporal optimizing models of growth," Journal of International Trade & Economic Development, Taylor and Francis Journals, vol. 10(4), pages 411-428, December. [Downloadable!] (restricted)
  23. Marini, Giancarlo & van der Ploeg, Frederick, 1988. "Monetary and Fiscal Policy in an Optimising Model with Capital Accumulation and Finite Lives," Economic Journal, Royal Economic Society, vol. 98(392), pages 772-86, September. [Downloadable!] (restricted)
    Other versions:
  24. Wang, Ping & Yip, Chong K, 1992. "Alternative Approaches to Money and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(4), pages 553-62, November. [Downloadable!] (restricted)
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  25. Pedro Cavalcanti Ferreira & Alberto Trejos, 2006. "On The Output Effects Of Barriers To Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(4), pages 1319-1340, November. [Downloadable!] (restricted)
  26. Pecorino, Paul, 1995. "Inflation, human capital accumulation and long-run growth," Journal of Macroeconomics, Elsevier, vol. 17(3), pages 533-542. [Downloadable!] (restricted)
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