Inflation, volatile public spending, and endogenously sustained growth
I construct a model of an economy whose government finances volatile public spending via money creation. The model jointly accounts for the emergence of some well-known empirical observations. Specifically, it predicts a negative correlation between output growth and policy volatility. Furthermore, given that both the mean and the variance of the inflation rate are elevated by fluctuations in public spending, the model provides a novel theoretical justification for the simultaneous negative correlation of long-run growth with both average inflation and inflation variability. The model also supports the view that policy volatility reduces social welfare.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Joshua Aizenman & Nancy Marion, 1991.
"Policy Uncertainty, Persistence and Growth,"
NBER Working Papers
3848, National Bureau of Economic Research, Inc.
- Stanley Fischer & Ratna Sahay & Carlos A. V�gh, 2002.
"Modern Hyper- and High Inflations,"
Journal of Economic Literature,
American Economic Association, vol. 40(3), pages 837-880, September.
- Stanley Fischer & Ratna Sahay & Carlos A. VÃ©gh Gramont, 2002. "Modern Hyper- and High Inflations," IMF Working Papers 02/197, International Monetary Fund.
- Stanley Fischer & Ratna Sahay & Carlos A. Vegh, 2002. "Modern Hyper- and High Inflations," NBER Working Papers 8930, National Bureau of Economic Research, Inc.
- Alessandro Prati & Thierry Tressel, 2006. "What is the Most Effective Monetary Policy for Aid-Receiving Countries?," Working Papers 12, United Nations, Department of Economics and Social Affairs.
- Kevin B. Grier & Mark J. Perry, 2000. "The effects of real and nominal uncertainty on inflation and output growth: some garch-m evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(1), pages 45-58.
- Hopenhayn, Hugo A & Muniagurria, Maria E, 1996.
"Policy Variability and Economic Growth,"
Review of Economic Studies,
Wiley Blackwell, vol. 63(4), pages 611-25, October.
- Hopenhayn, H. & Maniagurria, M.E., 1996. "Policy Variability and Economic Growth," RCER Working Papers 422, University of Rochester - Center for Economic Research (RCER).
- Hugo A. Hopenhayn & Maria E. Muniagurría, 1993. "Policy variability and economic growth," Economics Working Papers 30, Department of Economics and Business, Universitat Pompeu Fabra.
- Poterba, James M & Rotemberg, Julio J, 1990.
"Inflation and Taxation with Optimizing Governments,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 22(1), pages 1-18, February.
- Poterba, J.M. & Rotemberg, J.J., 1989. "Inflation And Taxation With Optimizing Governments," Working papers 521, Massachusetts Institute of Technology (MIT), Department of Economics.
- James M. Poterba & Julio J. Rotemberg, 1988. "Inflation And Taxation With Optimizing Governments," NBER Working Papers 2567, National Bureau of Economic Research, Inc.
- Ruth Judson & Athanasios Orphanides, 1996.
"Inflation, volatility and growth,"
Finance and Economics Discussion Series
96-19, Board of Governors of the Federal Reserve System (U.S.).
- Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
- Wilson, Bradley Kemp, 2006. "The links between inflation, inflation uncertainty and output growth: New time series evidence from Japan," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 609-620, September.
- Dotsey, Michael & Sarte, Pierre Daniel, 2000. "Inflation uncertainty and growth in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 631-655, June.
- Dimitrios Varvarigos, 2007. "Policy Variability, Productive Spending and Growth," Economica, London School of Economics and Political Science, vol. 74(294), pages 299-313, 05.
- Robert J. Barro, 2012.
"Inflation and Economic Growth,"
CEMA Working Papers
568, China Economics and Management Academy, Central University of Finance and Economics.
- Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
- Brunetti, Aymo, 1998. "Policy volatility and economic growth: A comparative, empirical analysis," European Journal of Political Economy, Elsevier, vol. 14(1), pages 35-52, February.
- Fountas, Stilianos & Karanasos, Menelaos, 2007.
"Inflation, output growth, and nominal and real uncertainty: Empirical evidence for the G7,"
Journal of International Money and Finance,
Elsevier, vol. 26(2), pages 229-250, March.
- Stilianos Fountas & Menelaos Karanasos, 2002. "Inflation, Output Growth, and Nominal and Real Uncertainty: Empirical Evidence for the G7," Working Papers 0064, National University of Ireland Galway, Department of Economics, revised 2002.
- Robert J. Hodrick & Narayana Kocherlakota & Deborah Lucas, 1989.
"The Variability of Velocity in Cash-In-Advance Models,"
NBER Working Papers
2891, National Bureau of Economic Research, Inc.
- Hodrick, Robert J & Kocherlakota, Narayana R & Lucas, Deborah, 1991. "The Variability of Velocity in Cash-in-Advance Models," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 358-84, April.
- Norman V. Loayza & Romain Rancière & Luis Servén & Jaume Ventura, 2007. "Macroeconomic Volatility and Welfare in Developing Countries: An Introduction," World Bank Economic Review, World Bank Group, vol. 21(3), pages 343-357, October.
- Koreshkova, Tatyana A., 2006. "A quantitative analysis of inflation as a tax on the underground economy," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 773-796, May.
- Davide Furceri, 2007. "Is Government Expenditure Volatility Harmful for Growth? A Cross-Country Analysis," Fiscal Studies, Institute for Fiscal Studies, vol. 28(1), pages 103-120, 03.
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:34:y:2010:i:10:p:1893-1906. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.