Growth, inflation, and economic policy in a stochastic cash-in-advance economy
We develop a continuous-time stochastic growth model with recursive preferences, money and public debt. In equilibrium growth and inflation follow geometric Brownian motions, with parameters determined by solving a system of nonlinear equations. Permanent changes in government expenditures and taxes have both real and nominal effects producing often reverse Mundell-Tobin effects. Superneutrality holds when money supply changes are caused by open market operations, irrespective of the primary fiscal stance. The magnitude of the policy effects are examined using a calibrated version of the model.
Volume (Year): 10 (1997)
Issue (Month): 2 (Autumn)
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- Honkapohja, Seppo & Lempinen, Urho, 1987. "Government Deficits and Speculation," CEPR Discussion Papers 192, C.E.P.R. Discussion Papers.
- Labadie, Pamela, 1989.
"Stochastic inflation and the equity premium,"
Journal of Monetary Economics,
Elsevier, vol. 24(2), pages 277-298, September.
- Pamela Labadie, 1989. "Stochastic inflation and the equity premium," Discussion Paper / Institute for Empirical Macroeconomics 12, Federal Reserve Bank of Minneapolis.
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