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Inflation and Growth

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  • Stanley Fischer
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    Abstract

    Models of inflation and growth in the sixties emphasized the portfolio substitution mechanism by which higher inflation made capital more attractive to hold relative to money, leading to higher capital intensity, and in the transition period to higher growth.The empirical evidence, however, is that growth and inflation are negatively correlated. Reasons for this negative correlation are investigated, and then embodied in a simple monetary maximizing model. Higher inflation is associated with lower growth because lower real balances reduce the efficiency of factors of production, and because there may be a link between government purchases and the use of the inflation tax. Comparative steady states and comparative dynamics is analyzed and the generally negative association between inflation and growth, both in steady states and in transition processes, is demonstrated.

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    File URL: http://www.nber.org/papers/w1235.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1235.

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    Date of creation: Nov 1983
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    Handle: RePEc:nbr:nberwo:1235

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    References

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    1. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 517-33, December.
    2. Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 28-43 National Bureau of Economic Research, Inc.
    3. D. K. Foley & M. Sidrauski, 1968. "Portfolio Choice, Investment, and Growth," Working papers 24, Massachusetts Institute of Technology (MIT), Department of Economics.
    4. Dornbusch, Rudiger, 1977. "Inflation, Capital, and Deficit Finance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 141-50, February.
    5. Olivera, Julio H G, 1970. "On Passive Money," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 805-14, Part II J.
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    Cited by:
    1. Marcelo Ochoa & Walter Orellana Rocha, 2002. "Una aproximación no lineal a la relación inflación - crecimiento económico: Un estudio para América Latina," Revista de Análisis del BCB, Banco Central de Bolivia, vol. 5(2), pages 87-126, December.
    2. Benedict J. Clements & Sanjeev Gupta & Emanuele Baldacci & Carlos Mulas-Granados, 2002. "Expenditure Composition, Fiscal Adjustment, and Growth in Low-Income Countries," IMF Working Papers 02/77, International Monetary Fund.
    3. Omay, Tolga & Öznur Kan, Elif, 2010. "Re-examining the threshold effects in the inflation-growth nexus with cross-sectionally dependent non-linear panel: Evidence from six industrialized economies," Economic Modelling, Elsevier, vol. 27(5), pages 996-1005, September.
    4. Derek Laing & Victor E. Li & Ping Wang, 2000. "Inflation, trade frictions, and productive activity in a multiple-matching model of money," Working Paper 2000-28, Federal Reserve Bank of Atlanta.
    5. Wang, Ping & Xie, Danyang, 2012. "Real effects of money growth and optimal rate of inflation in a cash-in-advance economy with labor-market frictions," MPRA Paper 42291, University Library of Munich, Germany.
    6. Ahmed, Shaghil & Rogers, John H., 2000. "Inflation and the great ratios: Long term evidence from the U.S," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 3-35, February.
    7. Gupta, Sanjeev & Clements, Benedict & Baldacci, Emanuele & Mulas-Granados, Carlos, 2005. "Fiscal policy, expenditure composition, and growth in low-income countries," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 441-463, April.
    8. George T. McCandless, Jr. & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
    9. LAU, Chi Keung Marco, 2010. "New evidence about regional income divergence in China," China Economic Review, Elsevier, vol. 21(2), pages 293-309, June.
    10. Derek Laing & Victor E. Li & Ping Wang, 1998. "Inflation and economic activity in a multiple matching model of money," Working Papers 1998-018, Federal Reserve Bank of St. Louis.
    11. 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.

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