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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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    Cited by:

    1. 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.
    2. repec:eee:ecmode:v:75:y:2018:i:c:p:159-168 is not listed on IDEAS
    3. 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.
    4. OIKAWA Koki & UEDA Kozo, 2018. "Reallocation Effects of Monetary Policy," Discussion papers 18056, Research Institute of Economy, Trade and Industry (RIETI).
    5. 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.
    6. repec:eee:eecrev:v:98:y:2017:i:c:p:392-409 is not listed on IDEAS
    7. 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.
    8. He, Qichun, 2018. "Health and Innovation in a Monetary Schumpeterian Growth Model," MPRA Paper 85218, University Library of Munich, Germany.

    More about this item

    Keywords

    Endogenous growth; Cash-in-advance constraints; Heterogeneous agents; Nonlinear relationship;

    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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