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Search and endogenous growth: when Romer meets Lagos and Wright

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

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36691.

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Date of creation: Feb 2012
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Handle: RePEc:pra:mprapa:36691
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  1. Shouyong Shi, 1998. "Search, Inflation, and Capital Accumulation," Working Papers 971, Queen's University, Department of Economics.
  2. Lagos, Ricardo & Rocheteau, Guillaume, 2008. "Money and capital as competing media of exchange," Journal of Economic Theory, Elsevier, vol. 142(1), pages 247-258, September.
  3. Paul Gomme, 1991. "Money and growth revisited," Discussion Paper / Institute for Empirical Macroeconomics 55, Federal Reserve Bank of Minneapolis.
  4. Gomme, P., 1993. "Money and Growth Revisited : Measuring the Costs of Inflation in an Endogenous Growth Model," Discussion Papers dp93-03, Department of Economics, Simon Fraser University.
  5. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
  6. Yip, C.K. & Wang, P., 1989. "Alternative Approaches To Money And Growth," Papers 8-89-4, Pennsylvania State - Department of Economics.
  7. Christopher J. Waller, 2009. "Random matching and money in the neoclassical growth model: some analytical results," Working Papers 2009-034, Federal Reserve Bank of St. Louis.
  8. Jun-ichi Itaya & Kazuo Mino, 2005. "Technology, Preference Structure, and the Growth Effect of Money Supply," Discussion Papers in Economics and Business 05-35, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  9. Mino, Kazuo, 1997. "Long-Run Effects of Monetary Expansion in a Two-Sector Model of Endogenous Growth," Journal of Macroeconomics, Elsevier, vol. 19(4), pages 635-655, October.
  10. S. Boragan Aruoba & Christopher J. Waller, 2005. "Money and Capital," 2005 Meeting Papers 550, Society for Economic Dynamics.
  11. Jun-Ichi Itaya & Kazuo Mino, 2003. "Inflation, Transaction Costs and Indeterminacy in Monetary Economies with Endogenous Growth," Economica, London School of Economics and Political Science, vol. 70(279), pages 451-470, 08.
  12. Ben Craig & Guillaume Rocheteau, 2008. "Inflation and Welfare: A Search Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 89-119, 02.
  13. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  14. Guillaume Rocheteau & Randall Wright, 2004. "Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium," Working Paper 0405, Federal Reserve Bank of Cleveland.
  15. Michael Dotsey & Peter Ireland, 1994. "The welfare cost of inflation in general equilibrium," Working Paper 94-04, Federal Reserve Bank of Richmond.
  16. Menner Martin, 2006. "A Search-Theoretic Monetary Business Cycle Model with Capital Formation," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-36, November.
  17. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
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