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Short-term price rigidity in an endogenous growth model: Non-Superneutrality and a non-vertical long-term Phillips-curve

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  • Peter Funk
  • Bettina Kromen

Abstract

This model analyses the interaction between inflation and the long-run levels of employment and output growth in a Schumpeterian growth model with quality improving innovations under nominal price rigidity. At the unique REE steady state equilibrium, both employment and growth are hump-shaped functions of money growth peaking at positive inflation rates. This is due to four effects of money growth under rigidity: Erosion of its relative price through inflation and the optimal initial mark-up set in anticipation of this influence a firm’s profits. Dispersion in relative prices causes inefficient production while the change in the average mark-up influences aggregate demand.

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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 29.

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Date of creation: 14 Nov 2006
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Handle: RePEc:kls:series:0029

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Keywords: Inflation; price rigidity; endogenous growth; employment; long-run Phillips curve;

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Cited by:
  1. Arato, Hiroki, 2008. "Long-run relationship between inflation and growth in a New Keynesian framework," MPRA Paper 11388, University Library of Munich, Germany.

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