Long-run relationship between inflation and growth in a New Keynesian framework
This study examines the steady-state growth effect of inflation in an endogenous growth model in which Calvo-type nominal rigidity with endogenous contract duration and monetary friction via wage-payment-in-advance constraint are assumed. On the balanced-growth path in this model, the marginal growth effect of inflation is weakly negative or even positive at low inflation rates because the effect on average markup offsets the negative marginal growth effect through the monetary friction, but the growth effect of inflation is negative and convex at higher inflation rates because the frequency of price adjustment approaches that of the flexible-price economy and the growth effect through the nominal rigidity is dominated by the growth effect through the monetary friction. With a plausible calibration of the structural parameters, this model generates a relationship between inflation and growth that is consistent with empirical evidence, particularly in industrial countries.
Volume (Year): 29 (2009)
Issue (Month): 3 ()
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- Niloy Bose, 2002. "Inflation, the credit market, and economic growth," Oxford Economic Papers, Oxford University Press, vol. 54(3), pages 412-434, July.
- Arato, Hiroki, 2008.
"Long-run relationship between inflation and growth in a New Keynesian framework,"
11388, University Library of Munich, Germany.
- Hiroki Arato, 2009. "Long-run relationship between inflation and growth in a New Keynesian framework," Economics Bulletin, AccessEcon, vol. 29(3), pages 1863-1872.
- Abdelhak S Senhadji & Mohsin S. Khan, 2000.
"Threshold Effects in the Relationship Between Inflation and Growth,"
IMF Working Papers
00/110, International Monetary Fund.
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- Levin, Andrew & Yun, Tack, 2007. "Reconsidering the natural rate hypothesis in a New Keynesian framework," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1344-1365, July.
- Fu-Sheng Hung, 2008. "Non-productive consumption loans and threshold effects in the inflation-growth relationship," Oxford Economic Papers, Oxford University Press, vol. 60(2), pages 318-342, April.
- Peter Funk & Bettina Kromen, 2006. "Short-term price rigidity in an endogenous growth model: Non-Superneutrality and a non-vertical long-term Phillips-curve," Working Paper Series in Economics 29, University of Cologne, Department of Economics.
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