Long-Run Impacts of Inflation Tax with Endogenous Capital Depreciation
This paper examines the long-run impact of inflation tax in the context of a generalized Ak growth model in which the rate of capital depreciation is endogenously determined. It is assumed that the rate of capital depreciation positively depends on capital utilization rate and negatively depends on maintenance spending. Money is introduced via a cash in advance constraint that may apply to the maintenance expenditure as well as to consumption and investment spending. We find that the long-run effects of inflation tax are more complex than those obtained in the monetary Ak growth model with a fixed capital depreciation rate. In particular, the relation between inflation and growth is highly sensitive to the specifications of the capital depreciation technology as well as to the forms of cash-in-advance constraint.
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