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The Inflation Tax, Variable Time Preference, and the Business Cycle

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  • R. Lahiri

Abstract

This paper investigates the impact of anticipated inflation on features of the business cycle in the presence of recursive but intertemporally dependent tastes. Intertemporal dependence is induced by the presence of a variable or endogenous individual rate of time preference. Quantitative experiments indicate that variability in the rate of time preference can enhance the contribution of monetary shocks to the fluctuations of real variables. Another implication of the variable-time-preference model is that, unlike the fixed time preference model, the business cycle features in high inflation and low inflation economies can be very different. The contribution of monetary shocks to fluctuations increases partly because endogenous time preference accentuates inflation-tax effects, which are already present in the standard framework because of the presence of cash-in-advance constraints. The change in the relative role of monetary shocks is also related to how variable time preference alters the effects of technology shocks, which can be quantitatively or qualitatively different in comparison to the standard model, depending on the parameters of the model.
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  • R. Lahiri, 1998. "The Inflation Tax, Variable Time Preference, and the Business Cycle," Economics Discussion / Working Papers 98-04, The University of Western Australia, Department of Economics.
  • Handle: RePEc:uwa:wpaper:98-04
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    Cited by:

    1. Aoki, Yoshimasa & Tomoda, Yasunobu, 2009. "Optimal money supply in models with endogenous discount factor," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 798-810, August.
    2. Radhika Lahiri & Elizabeth Richardson, 2008. "Public and Private Expenditures on Health in the Presence of Inequality and Endogenous Mortality: A Political Economy Perspective," School of Economics and Finance Discussion Papers and Working Papers Series 240, School of Economics and Finance, Queensland University of Technology, revised 15 Dec 2008.
    3. Lahiri, Radhika & Magnani, Elisabetta, 2012. "Endogenous skill heterogeneity and inflation," Economic Modelling, Elsevier, vol. 29(5), pages 1745-1756.
    4. Radhika Lahiri & Elisabetta Magnani, 2007. "On Skill Heterogeneity, Human Capital, and Inflation," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 13(3), pages 393-394, August.

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