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Search and endogenous growth: when Romer meets Lagos and Wright

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  • Chu, Angus C.
  • Lai, Ching-Chong
  • Liao, Chih-Hsing

Abstract

In this note, we develop a search-based monetary growth model to analyze the growth and welfare effects of inflation. We introduce endogenous growth via capital externality into a two-sector search model and compare the effects of inflation to those from a standard cash-in-advance (CIA) growth model. We �find two important differences between the two approaches. First, while the growth effect of inflation operates solely through endogenous labor supply in the CIA model, the growth effect of inflation operates through an additional consumption effect in the decentralized market in the search model. Second, we quantitatively evaluate the welfare cost of inflation and fi�nd that the search model exhibits a larger (smaller) welfare gain than the CIA model when we decrease the growth rate of money supply to achieve the Friedman rule (zero inflation). These contrasting results are due to a non-linearity in welfare as a function of inflation in the search model.

Suggested Citation

  • Chu, Angus C. & Lai, Ching-Chong & Liao, Chih-Hsing, 2012. "Search and endogenous growth: when Romer meets Lagos and Wright," MPRA Paper 36691, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:36691
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. He, Qichun & Zou, Heng-fu, 2016. "Does inflation cause growth in the reform-era China? Theory and evidence," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 470-484.
    2. Chu, Angus C. & Kan, Kamhon & Lai, Ching-Chong & Liao, Chih-Hsing, 2014. "Money, random matching and endogenous growth: A quantitative analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 173-187.
    3. Jonathan Chiu & Cesaire Meh & Randall Wright, 2017. "Innovation And Growth With Financial, And Other, Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58, pages 95-125, February.
    4. Chang, Juin-Jen & Lai, Ching-Chong & Liao, Chih-Hsing, 2017. "Welfare Cost of Inflation: The Role of Price Markups and Increasing Returns to Production Specialization," MPRA Paper 77753, University Library of Munich, Germany.
    5. Angus C., Chu & Lei, Ning & Dongming, Zhu, 2016. "Human Capital and Innovation in a Monetary Schumpeterian Growth Model," MPRA Paper 70453, University Library of Munich, Germany.
    6. Chu, Angus C. & Liao, Chih-Hsing & Liu, Xiangbo & Zhang, Mengbo, 2015. "Indeterminacy in a Matching Model of Money with Productive Government Expenditure," MPRA Paper 67172, University Library of Munich, Germany.
    7. 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

    economic growth; inflation; monetary policy;

    JEL classification:

    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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