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Inflation and Balanced-Path Growth with Alternative Payment Mechanisms

  • Max Gillman


    (Central European University, Department of Economics)

  • Michal Kejak



The paper shows that contrary to conventional wisdom an endogenous growth economy with human capital and alternative payment mechanisms can robustly explain major facets of the long run inflation experience. A negative inflation-growth relation is explained, including a striking nonlinearity found re-peatedly in empirical studies. A set of Tobin (1965) effects are also explained and, further, linked in magnitude to the growth effects through the interest elasticity of money demand. Undis-closed previously, this link helps fill out the intuition of how the inflation experience can be plausibly explained in a robust fashion with a model extended to include credit as a payment mechanism.

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Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0402.

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Length: 40 pages
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:has:discpr:0402
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  1. Haslag, Joseph H, 1998. "Monetary Policy, Banking, and Growth," Economic Inquiry, Western Economic Association International, vol. 36(3), pages 489-500, July.
  2. Zvi Eckstein & Leonardo Leiderman, 1991. "Seigniorage and the welfare cost of inflation: evidence from an intertemporal model of money and consumption," Discussion Paper / Institute for Empirical Macroeconomics 40, Federal Reserve Bank of Minneapolis.
  3. Robert J. Barro, 2001. "Human Capital and Growth," American Economic Review, American Economic Association, vol. 91(2), pages 12-17, May.
  4. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  5. Love, D.R.F. & Wen, J.F., 1995. "Inflation Welfare, and the Time-Costs of Transacting," Working Papers 1995-05, Brock University, Department of Economics.
  6. Ruth Judson & Athanasios Orphanides, 1996. "Inflation, volatility and growth," Finance and Economics Discussion Series 96-19, Board of Governors of the Federal Reserve System (U.S.).
  7. Gylfason, Thorvaldur & Herbertsson, Tryggvi Thor, 2001. "Does inflation matter for growth?," Japan and the World Economy, Elsevier, vol. 13(4), pages 405-428, December.
  8. Robert J. Hodrick & Narayana Kocherlakota & Deborah Lucas, 1989. "The Variability of Velocity in Cash-In-Advance Models," NBER Working Papers 2891, National Bureau of Economic Research, Inc.
  9. S. Rao Aiyagari & R. Anton Braun & Zvi Eckstein, 1995. "Transaction services, inflation, and welfare," Working Papers 551, Federal Reserve Bank of Minneapolis.
  10. William T. Gavin & Finn E. Kydland, 1996. "Endogenous money supply and the business cycle," Working Paper 9605, Federal Reserve Bank of Cleveland.
  11. Larry E. Jones & Rodolfo E. Manuelli & Peter E. Rossi, 1993. "On the Optimal Taxation of Capital Income," NBER Working Papers 4525, National Bureau of Economic Research, Inc.
  12. Ahmed, Shaghil & Rogers, John H., 2000. "Inflation and the great ratios: Long term evidence from the U.S," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 3-35, February.
  13. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  14. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank.
  15. Fernando Alvarez & Robert E. Lucas & Warren E. Weber, 2001. "Interest Rates and Inflation," American Economic Review, American Economic Association, vol. 91(2), pages 219-225, May.
  16. Gomme, Paul, 1993. "Money and growth revisited : Measuring the costs of inflation in an endogenous growth model," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 51-77, August.
  17. Max Gillman & Anton Nakov, 2003. "A Revised Tobin Effect from Inflation: Relative Input Price and Capital Ratio Realignments, USA and UK, 1959-1999," Economica, London School of Economics and Political Science, vol. 70(279), pages 439-450, 08.
  18. Max Gillman & Michal Kejak, 2005. "Contrasting Models of the Effect of Inflation on Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 19(1), pages 113-136, 02.
  19. Max Gillman, 1995. "Comparing Partial And General Equilibrium Estimates Of The Welfare Cost Of Inflation," Contemporary Economic Policy, Western Economic Association International, vol. 13(4), pages 60-71, October.
  20. Max Gillman & Michal Kejak, 2004. "The Demand for Bank Reserves and Other Monetary Aggregates," Economic Inquiry, Western Economic Association International, vol. 42(3), pages 518-533, July.
  21. Dotsey, Michael & Sarte, Pierre Daniel, 2000. "Inflation uncertainty and growth in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 631-655, June.
  22. Gillman, Max, 1993. "The welfare cost of inflation in a cash-in-advance economy with costly credit," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 97-115, February.
  23. Marvin Goodfriend, 1997. "A framework for the analysis of moderate inflations," Working Paper 97-04, Federal Reserve Bank of Richmond.
  24. Max Gillman & Mark N. Harris, 2010. "The effect of inflation on growth," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 18(4), pages 697-714, October.
  25. Max Gillman, 2000. "On the Optimality of Restricting Credit: Inflation Avoidance and Productivity," The Japanese Economic Review, Japanese Economic Association, vol. 51(3), pages 375-390, 09.
  26. Max Gillman & Mark N. Harris & László Mátyás, 2004. "Inflation and growth: Explaining a negative effect," Empirical Economics, Springer, vol. 29(1), pages 149-167, January.
  27. Atish R. Ghosh & Steven Phillips, 1998. "Inflation, Disinflation, and Growth," IMF Working Papers 98/68, International Monetary Fund.
  28. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  29. Mohsin S. Khan & A. Senhadji Semlali, 2000. "Financial Development and Economic Growth: An Overview," IMF Working Papers 00/209, International Monetary Fund.
  30. Nelson C. Mark & Donggyu Sul, 2002. "Cointegration Vector Estimation by Panel DOLS and Long-Run Money Demand," NBER Technical Working Papers 0287, National Bureau of Economic Research, Inc.
  31. Gillman Max K & Yerokhin Oleg, 2005. "Ramsey-Friedman Optimality with Banking Time," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-24, July.
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