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On the Nonlinear Relationship between Inflation and Growth: A Theoretical Exposition

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  • Ryo Arawatari

    (Graduate School of Economics, Nagoya University)

  • Takeo Hori

    (Department of Industrial Engineering and Economics, School of Engineering, Tokyo Institute of Technology)

  • Kazuo Mino

    (Faculty of Economics, Doshisha University)

Abstract

This study introduces cash-in-advance constraints into an R&D-based model of endogenous growth in which agents’abilities to develop new goods are heterogeneous. We demonstrate that the negative effect of inflation on long-term growth is weaker in the heterogeneous ability economy than in the homogeneous ability economy if the inflation rate is relatively low, whereas the opposite outcome holds in the high inflation regime. Our numerical examples show that the threshold level of inflation is about 20% per year, which fits well with the findings of existing empirical studies of the nonlinear relation between inflation and growth.

Suggested Citation

  • Ryo Arawatari & Takeo Hori & Kazuo Mino, 2016. "On the Nonlinear Relationship between Inflation and Growth: A Theoretical Exposition," KIER Working Papers 950, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:950
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    More about this item

    Keywords

    endogenous growth; cash-in-advance constraints; heterogeneous agents; nonlinear relationship;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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