Tradeoff between Inflation Stabilization and Growth Maximization
AbstractThis paper analyzes monetary policy implication in an endogenous growth model in which the average growth rate is inefficiently low and in which the capital accumulation technology is concave. This paper does two exercises. First, we derive the utility-based welfare criterion of the model. The welfare measure suggests that even if the natural rate of growth moves parallel to its efficient rate, the increase of inflation volatility may improve welfare through the increase of average growth. Second, we test this hypothesis numerically and show that in our calibrated model the tradeoff between inflation stabilization and average growth maximization exists. In addition, the tradeoff is resolved by highly growth-stimulating (investment stabilization) policy. The reason is the existence of concavity in the capital accumulation technology, through which investment stabilization rises average growth.
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Bibliographic InfoPaper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 664.
Date of creation: Jan 2009
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Postal: Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501
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Endogenous Growth; Monetary Stabilization Policy;
Find related papers by JEL classification:
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-01-17 (All new papers)
- NEP-CBA-2009-01-17 (Central Banking)
- NEP-DGE-2009-01-17 (Dynamic General Equilibrium)
- NEP-MAC-2009-01-17 (Macroeconomics)
- NEP-MON-2009-01-17 (Monetary Economics)
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