Inflation and Growth: A New Keynesian Perspective

25 Pages Posted: 23 Jul 2012

See all articles by Robert A. Amano

Robert A. Amano

Bank of Canada & CREFE

Tom Carter

Princeton University

Kevin Moran

Laval University - Department of Economics

Date Written: July 23, 2012

Abstract

The long-run relation between growth and inflation has not yet been studied in the context of nominal price and wage rigidities, despite the fact that these rigidities now figure prominently in workhorse macroeconomic models. We therefore integrate staggered price- and wage-setting into an endogenous growth framework. In this setting, growth and inflation are linked via the incentive to innovate. For standard calibrations, the linkage is strong: as trend inflation shifts from -5 to 5 percent, the range over which the economy's steady-state growth rate varies spans 50 basis points, implying up to a 15 percent output differential after thirty years. Nominal wage rigidity plays a critical role in generating these results, and compounding of inflation's growth effects implies large welfare losses. Endogenous growth thus proves a key channel via which inflation impacts New Keynesian economies.

Keywords: non-superneutrality, endogenous growth, welfare costs of inflation

JEL Classification: E31, E52, O31, O42

Suggested Citation

Amano, Robert A. and Carter, Tom and Moran, Kevin, Inflation and Growth: A New Keynesian Perspective (July 23, 2012). CIRANO - Scientific Publications 2012s-20. Available at SSRN: https://ssrn.com/abstract=2115651 or http://dx.doi.org/10.2139/ssrn.2115651

Robert A. Amano

Bank of Canada & CREFE ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-8827 (Phone)
613-782-7163 (Fax)

Tom Carter

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

Kevin Moran (Contact Author)

Laval University - Department of Economics ( email )

2325 Rue de l'Université
Ste-Foy, Quebec G1K 7P4 G1K 7P4
Canada

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