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On the nonlinear relationship between inflation and growth: A theoretical exposition

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  • Arawatari, Ryo
  • Hori, Takeo
  • Mino, Kazuo

Abstract

The relationship between inflation and growth is examined in an R&D-based model of endogenous growth in which the R&D abilities of agents are heterogeneous. We analytically demonstrate that if the distribution of ability has a fat and long tail, the relationship between inflation and growth becomes nonlinear; the negative relationship between inflation and growth is weaker in the heterogeneous ability economy than it is in the homogeneous ability economy for low inflation, whereas the opposite outcome holds for high inflation. Our numerical example shows that this nonlinear relationship between inflation and growth holds under plausible parameter values.

Suggested Citation

  • Arawatari, Ryo & Hori, Takeo & Mino, Kazuo, 2018. "On the nonlinear relationship between inflation and growth: A theoretical exposition," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 79-93.
  • Handle: RePEc:eee:moneco:v:94:y:2018:i:c:p:79-93
    DOI: 10.1016/j.jmoneco.2017.12.001
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    2. Zheng, Zhijie & Mishra, Tapas & Yang, Yibai, 2020. "Inflation and income inequality in a variety-expansion growth model with menu costs," Economics Letters, Elsevier, vol. 194(C).
    3. Rangan Gupta & Philton Makena, 2019. "Inflation Aversion and the Growth-Inflation Relationship," Annals of Economics and Finance, Society for AEF, vol. 20(2), pages 803-815, November.
    4. MIYAKAWA Daisuke & OIKAWA Koki & UEDA Kozo, 2018. "Reallocation Effects of Monetary Policy," Discussion papers 18056, Research Institute of Economy, Trade and Industry (RIETI).
    5. Ryo Arawatari & Takeo Hori & Kazuo Mino, 2020. "Productive government expenditure and economic growth in a heterogeneous-agents model," KIER Working Papers 1044, Kyoto University, Institute of Economic Research.
    6. Daiki Maeda & Yuki Saito, 2020. "Effects of Monetary Policy in a Model with Cash-in-Advance Constraints on R&D and Capital Accumulation," ISER Discussion Paper 1076r, Institute of Social and Economic Research, Osaka University, revised Jun 2020.
    7. Bazzaoui, Lamia & Nagayasu, Jun, 2019. "Is Inflation Fiscally Determined?," MPRA Paper 95753, University Library of Munich, Germany.
    8. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi & Liao, Chih-Hsing, 2017. "Inflation and economic growth in a Schumpeterian model with endogenous entry of heterogeneous firms," European Economic Review, Elsevier, vol. 98(C), pages 392-409.
    9. Angus C. Chu & Guido Cozzi & Yuichi Furukawa & Chih‐Hsing Liao, 2019. "Inflation and Innovation in a Schumpeterian Economy with North–South Technology Transfer," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(2-3), pages 683-719, March.
    10. Angus C. Chu & Guido Cozzi & Haichao Fang & Yuichi Furukawa & Chih-Hsing Liao, 2019. "Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 141-164, October.
    11. Pedro Mazeda Gil & Gustavo Iglésias, 2020. "Endogenous Growth and Real Effects of Monetary Policy: R&D and Physical Capital Complementarities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(5), pages 1147-1197, August.
    12. Zheng, Zhijie & Huang, Chien-Yu & Yang, Yibai, 2018. "Inflation and Growth: A Non-Monotonic Relationship in an Innovation-Driven Economy," MPRA Paper 84768, University Library of Munich, Germany.
    13. He, Qichun & Zhang, Zhixiang, 2019. "Inflation and Growth: An Inverted-U Relationship," MPRA Paper 97092, University Library of Munich, Germany.
    14. Qinchun He & Yulei Luo & Jun Nie & Heng-fu Zou, 2020. "Money, Growth, and Welfare in a Schumpeterian Model with the Spirit of Capitalism," Research Working Paper RWP 20-16, Federal Reserve Bank of Kansas City.
    15. He, Qichun, 2018. "Inflation and health in a Schumpeterian growth model: Theory and evidence," Economic Modelling, Elsevier, vol. 75(C), pages 159-168.
    16. Zheng, Zhijie & Huang, Chien-Yu & Wan, Xi, 2020. "Human Capital and Income Inequality in a Monetary Schumpeterian Growth Model," MPRA Paper 101912, University Library of Munich, Germany.
    17. Pedro Mazeda Gil & Gustavo Iglésias,, 2018. "Endogenous Growth and Real Effects of Monetary Policy: R&D and Physical Capital Complementarities in a Cash-in-Advance Economy," CEF.UP Working Papers 1802, Universidade do Porto, Faculdade de Economia do Porto.
    18. Chu, Angus C., 2020. "Inflation, Innovation and Growth: A Survey," MPRA Paper 103740, University Library of Munich, Germany.
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    20. He, Qichun, 2018. "Health and Innovation in a Monetary Schumpeterian Growth Model," MPRA Paper 85218, University Library of Munich, Germany.

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    More about this item

    Keywords

    Endogenous growth; Cash-in-advance constraints; Heterogeneous agents; Nonlinear relationship;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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