On the Nonlinear Relationship between Inflation and Growth: A Theoretical Exposition

Ryo Arawatari, Takeo Hori (hori.t.ag@m.titech.ac.jp) and Kazuo Mino
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Takeo Hori: Department of Industrial Engineering and Economics, School of Engineering, Tokyo Institute of Technology

No 950, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: This study introduces cash-in-advance constraints into an R&D-based model of endogenous growth in which agents’abilities to develop new goods are heterogeneous. We demonstrate that the negative effect of inflation on long-term growth is weaker in the heterogeneous ability economy than in the homogeneous ability economy if the inflation rate is relatively low, whereas the opposite outcome holds in the high inflation regime. Our numerical examples show that the threshold level of inflation is about 20% per year, which fits well with the findings of existing empirical studies of the nonlinear relation between inflation and growth.

Keywords: endogenous growth; cash-in-advance constraints; heterogeneous agents; nonlinear relationship (search for similar items in EconPapers)
JEL-codes: E41 O40 O41 (search for similar items in EconPapers)
Pages: 40pages
Date: 2016-09
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: On the nonlinear relationship between inflation and growth: A theoretical exposition (2018)
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