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Real effects of money growth and optimal rate of inflation in a cash-in-advance economy with labor-market frictions

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  • Wang, Ping
  • Xie, Danyang

Abstract

This paper studies the consequences of labor-market frictions for the real effects of steady inflation when cash is required for households' consumption purchases and firms' wage payments. Money growth may generate a positive real effect by encouraging vacancy creation and raising job matches. This may result in a positive optimal rate of inflation, particularly in an economy with moderate money injections to firms and with nonnegligible labor-market frictions in which wage bargains are not efficient. This main finding holds for a wide range of money injection schemes, with alternative cash constraints, and in a second-best world with pre-existing distortionary taxes.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42291.

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Date of creation: 29 Oct 2012
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Handle: RePEc:pra:mprapa:42291

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Keywords: Cash Constraints; Nonsuperneutrality of Money; the Friedman rule; Labor-Market Frictions;

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