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On the Nonlinear Relationship between Inflation and Growth: A Theoretical Exposition

Author

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  • Ryo Arawatari

    () (Graduate School of Economics, Nagoya University)

  • Takeo Hori

    () (Department of Industrial Engineering and Economics, School of Engineering, Tokyo Institute of Technology)

  • Kazuo Mino

    () (Faculty of Economics, Doshisha University)

Abstract

This study introduces cash-in-advance constraints into an R&D-based model of endogenous growth in which agents’abilities to develop new goods are heterogeneous. We demonstrate that the negative effect of inflation on long-term growth is weaker in the heterogeneous ability economy than in the homogeneous ability economy if the inflation rate is relatively low, whereas the opposite outcome holds in the high inflation regime. Our numerical examples show that the threshold level of inflation is about 20% per year, which fits well with the findings of existing empirical studies of the nonlinear relation between inflation and growth.

Suggested Citation

  • Ryo Arawatari & Takeo Hori & Kazuo Mino, 2016. "On the Nonlinear Relationship between Inflation and Growth: A Theoretical Exposition," KIER Working Papers 950, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:950
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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:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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