Inflation, Factor Substitution and Growth

46 Pages Posted: 17 Feb 2004

See all articles by Rainer Klump

Rainer Klump

University of Frankfurt - Economics and Business Administration Area

Date Written: October 2003

Abstract

Recent empirical studies on the inflation-growth-relationship underline that inflation has negative growth effects already under relatively modest rates. Most contributions to monetary growth theory, however, have difficulties in explaining such a pattern. It is shown in this paper that this problem can be overcome by establishing a link between monetary instability and the aggregate elasticity of factor substitution. Several microeconomic justifications can be found for a negative influence of inflation on factor substitution. It turns out that already in a simple neoclassical monetary growth model this effect is usually strong enough to question the superneutrality benchmark result in the steady state and to dominate all potential positive effects of inflation along the convergence path. In a more general perspective the paper contributes to a better integration of institutional change in aggregate models of economic growth.

Keywords: Monetary growth models, inflation, CES production functions, neo-classical growth, convergence

JEL Classification: E52, O11, O41

Suggested Citation

Klump, Rainer, Inflation, Factor Substitution and Growth (October 2003). Available at SSRN: https://ssrn.com/abstract=487420 or http://dx.doi.org/10.2139/ssrn.487420

Rainer Klump (Contact Author)

University of Frankfurt - Economics and Business Administration Area ( email )

Schumannstrasse 60
D-60325 Frankfurt am Main
Germany
+49 69 798-22288 (Phone)
+49 69 798-28121 (Fax)

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