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Growth, inflation, and economic policy in a stochastic cash-in-advance economy

Author

Listed:
  • Seppo Honkapohja

    (Department of Economics, University of Helsinki, Finland)

  • Urho Lempinen

    (Currency Derivatives Ltd, Finland)

Abstract

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.

Suggested Citation

  • Seppo Honkapohja & Urho Lempinen, 1997. "Growth, inflation, and economic policy in a stochastic cash-in-advance economy," Finnish Economic Papers, Finnish Economic Association, vol. 10(2), pages 51-66, Autumn.
    • Handle: RePEc:fep:journl:v:10:y:1997:i:2:p:51-66
    as

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    References listed on IDEAS

    as
    1. Honkapohja, Seppo & Lempinen, Urho, 1990. "On Government Deficits and Speculation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 597-617, August.
    2. Labadie, Pamela, 1989. "Stochastic inflation and the equity premium," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 277-298, September.
    3. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-286, April.
    4. Corsetti, G., 1992. "A Portfolio Approach to Endogenous Growth Eaton's Model Revisited," Papers 678, Yale - Economic Growth Center.
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    More about this item

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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