Modeling the Inflation Growth Effect

Central European University Working Paper No. 7/2000

Posted: 2 Jan 2001

See all articles by Max Gillman

Max Gillman

Central European University (CEU) - Department of Economics

Michal Kejak

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: 2000

Abstract

This paper adds a credit services sector into a monetary endogenous growth economy in order to investigate the inflation-growth effect. We compare this economy to more standard models with respect to the effect of the money / credit exchange technology. We find a markedly negative effect of inflation on economic growth using very standard calibration parameters. Resulting estimates are within or close to the range reported in the literature, depending on the credit technology. Analytically the model employs a general equilibrium version of the Tobin-type substitution in the face of higher inflation that manifests as an increase in the effective capital to effective labor ratios across each of the sectors. An realistic large fall in growth results because of the combination of Lucas (1988) endogenous growth, in which more leisure time implies directly lower growth, and a capital intensive credit technology that induces resource reallocation across sectors so as to avoid the inflation tax.

Keywords: inflation, growth, Tobin-effect, credit-technology

JEL Classification: O42, E31, E13, H26

Suggested Citation

Gillman, Max and Kejak, Michal, Modeling the Inflation Growth Effect (2000). Central European University Working Paper No. 7/2000, Available at SSRN: https://ssrn.com/abstract=253034

Max Gillman (Contact Author)

Central European University (CEU) - Department of Economics ( email )

Nador u. 9.
Budapest H-1051
Hungary
+36 1 327 3227 (Phone)
+36 1 327 3232 (Fax)

Michal Kejak

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

Politickych veznu 7
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

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