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Real Effects of Money Growth and Optimal Rate of Inflation in a Cash‐in‐Advance Economy with Labor‐Market Frictions

  • PING WANG
  • DANYANG XIE

This paper studies the consequences of labor-market frictions for the real effects of steady inflation when cash is required for households' consumption purchases and firms' wage payments. Money growth may generate a positive real effect by encouraging vacancy creation and raising job matches. This may result in a positive optimal rate of inflation, particularly in an economy with moderate money injections to firms and with nonnegligible labor-market frictions in which wage bargains are not efficient. This main finding holds for a wide range of money injection schemes, with alternative cash constraints, and in a second-best world with pre-existing distortionary taxes.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 45 (2013)
Issue (Month): 8 (December)
Pages: 1517-1546

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Handle: RePEc:mcb:jmoncb:v:45:y:2013:i:8:p:1517-1546
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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