Inflation Uncertainty and Growth in a Simple Monetary Model

FRB Richmond Working Paper No. 97-5

32 Pages Posted: 19 Nov 2012

See all articles by Michael Dotsey

Michael Dotsey

Federal Reserve Bank of Philadelphia

Pierre-Daniel G. Sarte

Federal Reserve Bank of Richmond

Date Written: May 1, 1997

Abstract

This paper analyzes the effects of inflation variability on economic growth in a model where money is introduced via a cash-in-advance constraint. In this setting, we find that inflation adversely affects long-run growth, even when the cash-in-advance constraint applies only to consumption. At the same time, we find that inflation and growth are positively related in the short-run. In addition, variability tends to increase average growth through a precautionary savings motive. Since inflation and inflation variability tend to be highly correlated, this latter effect attenuates the negative long-run relationship between inflation and real growth. It also provides a partial rational for the notorious lack of robustness in cross-country regressions of growth and inflation.

Suggested Citation

Dotsey, Michael and Sarte, Pierre-Daniel, Inflation Uncertainty and Growth in a Simple Monetary Model (May 1, 1997). FRB Richmond Working Paper No. 97-5. Available at SSRN: https://ssrn.com/abstract=2129930 or http://dx.doi.org/10.2139/ssrn.2129930

Michael Dotsey (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
804-697-8201 (Phone)
804-697-8255 (Fax)

Pierre-Daniel Sarte

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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