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Monetary Growth, Inflation, and Economic Activity in a Dynamic Macro Model

  • Stephen J. Turnovsky

This paper analyzes the effects of an increase in the monetary growth rate within a dynamic optimizing macroeconomic model. Both the short-run and long-run effects, and therefore the adjustments along the transitional path, depend critically upon the tax structure and the firm's corresponding optimal financial decisions. With all bond financing, the effects depend upon the extent to which interest payments are tax deductible for corporations. If this is sufficiently high, the effects of an increase in the monetary growth rate are generally expansionary. With low interest deductibility, or if the tax structure induces equity financing, the effects arc generally contractionary.

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File URL: http://www.nber.org/papers/w2133.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2133.

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Date of creation: Jan 1987
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Publication status: published as Turnovsky, Stephen J., "Monetary Growth, Inflation, and Economic Activity in a Dynamic Macro Model," International Economic Review, Vol. 28, No. 3, October 1987.
Handle: RePEc:nbr:nberwo:2133
Note: ME
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