Inflation Uncertainty and Growth in a Cash-in-Advance Economy
Posted: 23 Sep 2001
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. Furthermore, variability increases average growth through a precautionary savings motive. Since inflation and inflation variability tend to be highly correlated, the presence of uncertainty attenuates the negative long-run relationship between inflation and real growth. It also provides a partial rationale for the apparent lack of robustness in cross-country regressions of growth and inflation.
Keyword(s): Economic growth; Inflation; Uncertainty
JEL Classification: E13; O42
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