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Search and endogenous growth: when Romer meets Lagos and Wright

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  • Chu, Angus C.
  • Lai, Ching-Chong
  • Liao, Chih-Hsing

Abstract

In this note, we develop a search-based monetary growth model to analyze the growth and welfare effects of inflation. We introduce endogenous growth via capital externality into a two-sector search model and compare the effects of inflation to those from a standard cash-in-advance (CIA) growth model. We �find two important differences between the two approaches. First, while the growth effect of inflation operates solely through endogenous labor supply in the CIA model, the growth effect of inflation operates through an additional consumption effect in the decentralized market in the search model. Second, we quantitatively evaluate the welfare cost of inflation and fi�nd that the search model exhibits a larger (smaller) welfare gain than the CIA model when we decrease the growth rate of money supply to achieve the Friedman rule (zero inflation). These contrasting results are due to a non-linearity in welfare as a function of inflation in the search model.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36691.

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Date of creation: Feb 2012
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Handle: RePEc:pra:mprapa:36691

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Keywords: economic growth; inflation; monetary policy;

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References

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  1. Itaya, Jun-Ichi & Mino, Kazuo, 2007. "Technology, Preference Structure, And The Growth Effect Of Money Supply," Macroeconomic Dynamics, Cambridge University Press, vol. 11(05), pages 589-612, November.
  2. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  3. Guillaume Rocheteau & Randall Wright, 2004. "Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium," Working Paper 0405, Federal Reserve Bank of Cleveland.
  4. Ben Craig & Guillaume Rocheteau, 2006. "Inflation and welfare: a search approach," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Jan.
  5. S. Boragan Aruoba & Christopher J. Waller, 2005. "Money and Capital," 2005 Meeting Papers 550, Society for Economic Dynamics.
  6. Ricardo Lagos & Guillaume Rocheteau, 2004. "Money and capital as competing media of exchange," Staff Report 341, Federal Reserve Bank of Minneapolis.
  7. Michael Dotsey & Peter Ireland, 1994. "The welfare cost of inflation in general equilibrium," Working Paper 94-04, Federal Reserve Bank of Richmond.
  8. Martin Menner, 2005. "A Search-Theoretic Monetary Business Cycle Model With Capital Formation," Economics Working Papers we056634, Universidad Carlos III, Departamento de Economía.
  9. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
  10. Shi, Shouyong, 1999. "Search, inflation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 81-103, August.
  11. Christopher J. Waller, 2009. "Random matching and money in the neoclassical growth model: some analytical results," Working Papers 2009-034, Federal Reserve Bank of St. Louis.
  12. Gomme, Paul, 1993. "Money and growth revisited : Measuring the costs of inflation in an endogenous growth model," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 51-77, August.
  13. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  14. Wang, Ping & Yip, Chong K, 1992. "Alternative Approaches to Money and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(4), pages 553-62, November.
  15. Jun-Ichi Itaya & Kazuo Mino, 2003. "Inflation, Transaction Costs and Indeterminacy in Monetary Economies with Endogenous Growth," Economica, London School of Economics and Political Science, vol. 70(279), pages 451-470, 08.
  16. repec:fth:simfra:93-03 is not listed on IDEAS
  17. Mino, Kazuo, 1997. "Long-Run Effects of Monetary Expansion in a Two-Sector Model of Endogenous Growth," Journal of Macroeconomics, Elsevier, vol. 19(4), pages 635-655, October.
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Cited by:
  1. Chu, Angus C. & Kan, Kamhon & Lai, Ching-Chong & Liao, Chih-Hsing, 2014. "Money, random matching and endogenous growth: A quantitative analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 173-187.

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