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Inflation and Innovation-driven Growth

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  • Peter Funk
  • Bettina Kromen

Abstract

This paper models the relationship between inflation and steady state growth in a model combining standard Schumpeterian growth with a standard New Keynesian specification of nominal price rigidity. Positive money growth has two clear-cut countervailing effects on the incentive to innovate. Past price rigidity causes the use of an inefficiently large quantity of cheap old intermediate goods, reducing demand for new ones and hence, the incentive to innovate. Future price rigidity erodes the new good’s relative price, increasing demand and therefore the current incentive to innovate. In numerical calibrations the negative effect of inflation on growth dominates.

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File URL: http://ockenfels.uni-koeln.de/fileadmin/wiso_fak/stawi-ockenfels/pdf/wp_series_download/wp0016.pdf
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Bibliographic Info

Paper provided by University of Cologne, Department of Economics in its series Working Paper Series in Economics with number 16.

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Date of creation: 15 Feb 2005
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Handle: RePEc:kls:series:0016

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Keywords: Inflation; endogenous growth; price rigidity;

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  1. Marquis, Milton H & Reffett, Kevin L, 1995. "The Inflation Tax in a Convex Model of Equilibrium Growth," Economica, London School of Economics and Political Science, vol. 62(245), pages 109-21, February.
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Cited by:
  1. Chu, Angus C. & Ji, Lei, 2012. "Monetary policy and endogenous market structure in a Schumpeterian economy," MPRA Paper 40467, University Library of Munich, Germany.
  2. Peter Funk & Bettina Kromen, 2006. "Short-term price rigidity in an endogenous growth model: Non-Superneutrality and a non-vertical long-term Phillips-curve," Working Paper Series in Economics 29, University of Cologne, Department of Economics.
  3. Chu, Angus C. & Lai, Ching-Chong & Liao, Chih-Hsing, 2010. "A tale of two growth engines: The interactive effects of monetary policy and intellectual property rights," MPRA Paper 30105, University Library of Munich, Germany, revised Apr 2011.
  4. Chien-Yu Huang & Juin-Jen Chang & Lei Ji, 2013. "Cash-In-Advance Constraint on R&D in a Schumpeterian Growth Model with an Endogenous Market Structure," IEAS Working Paper : academic research 13-A009, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  5. Robert Amano & Tom Carter & Kevin Moran, 2012. "Inflation and Growth: a New Keynesian Perspective," Cahiers de recherche 1228, CIRPEE.

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