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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.

Suggested Citation

  • Stephen J. Turnovsky, 1987. "Monetary Growth, Inflation, and Economic Activity in a Dynamic Macro Model," NBER Working Papers 2133, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2133
    Note: ME

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    References listed on IDEAS

    1. Don Fullerton & Roger H. Gordon, 1983. "A Reexamination of Tax Distortions in General Equilibrium Models," NBER Chapters,in: Behavioral Simulation Methods in Tax Policy Analysis, pages 369-426 National Bureau of Economic Research, Inc.
    2. Roger H. Gordon & James R. Hines, Jr. & Lawrence H. Summers, 1987. "Notes on the Tax Treatment of Structures," NBER Chapters,in: The Effects of Taxation on Capital Accumulation, pages 223-258 National Bureau of Economic Research, Inc.
    3. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-544, September.
    4. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
    5. Lawrence H. Summers, 1987. "Investment Incentives and the Discounting of Depreciation Allowances," NBER Chapters,in: The Effects of Taxation on Capital Accumulation, pages 295-304 National Bureau of Economic Research, Inc.
    6. Jorgenson, Dale W & Yun, Kun-Young, 1986. " Tax Policy and Capital Allocation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(2), pages 355-377.
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    Cited by:

    1. Bianconi, Marcelo, 1995. "Inflation and the real price of equities: Theory with some empirical evidence," Journal of Macroeconomics, Elsevier, vol. 17(3), pages 495-514.
    2. Chang, Wen-ya, 1999. "Government spending, endogenous labor, and capital accumulation," Journal of Economic Dynamics and Control, Elsevier, vol. 23(8), pages 1225-1242, August.

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