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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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    1. 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.
    2. Dornbusch, Rudiger, 1977. "Inflation, Capital, and Deficit Finance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 141-50, February.
    3. Foley, Duncan K & Sidrauski, Miguel, 1970. "Portfolio Choice, Investment and Growth," American Economic Review, American Economic Association, vol. 60(1), pages 44-63, March.
    4. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 517-33, December.
    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. George T. McCandless, Jr. & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
    2. Chienyu Huang & Juin Jen Chang & Lei Ji, 2013. "Cash in advance constraint on RD in a Schimpeterian growth model with an endogenous market structure," Documents de Travail de l'OFCE 2013-16, Observatoire Francais des Conjonctures Economiques (OFCE).
    3. 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.
    4. Shaghil Ahmed & John H. Rogers, 1998. "Inflation and the great ratios: long-term evidence from the U.S," International Finance Discussion Papers 628, Board of Governors of the Federal Reserve System (U.S.).
    5. Evžen Kočenda & Mathilde Maurel & Gunther Schnabl, 2012. "Short- and long-term growth effects of exchange rate adjustment," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00748599, HAL.
    6. 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.
    7. 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.
    8. Ahortor, Christian R.K. & Adenutsi, Deodat E., 2009. "Inflation, capital accumulation and economic growth in import-dependent developing countries," MPRA Paper 29353, University Library of Munich, Germany, revised 2010.
    9. 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.
    10. LAU, Chi Keung Marco, 2010. "New evidence about regional income divergence in China," China Economic Review, Elsevier, vol. 21(2), pages 293-309, June.
    11. 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.
    12. 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.
    13. 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.
    14. Danilo Trupkin & Raul Ibarra, 2011. "The Relationship between Inflation and Growth:A Panel Smooth Transition Regression Approach for Developed and Developing Countries," Documentos de Trabajo/Working Papers 1107, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
    15. 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.

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