Inflation and Growth in the Long Run: A New Keynesian Theory and Further Semiparametric Evidence

Andrea Vaona

No 09/2010, Working Papers from University of Verona, Department of Economics

Abstract: This paper explores the influence of inflation on economic growth both theoretically and empirically. We propose to merge an endogenous growth model of learning by doing with a New Keynesian one with sticky wages. We show that the intertemporal elasticity of substitution of working time is a key parameter for the shape of the inflation-growth nexus. When it is set equal to zero, the inflation-growth nexus is weak and hump-shaped. When it is greater than zero, inflation has a sizeable and negative effect on growth. Endogenizing the length of wage contracts does not lead to inflation superneutrality in presence of a fixed cost to wage resetting. Once adopting various semiparametric and instrumental variable estimation approaches on a cross-country/time-series dataset, we show that increasing inflation reduces real economic growth, consistently with our theoretical model with a positive intertemporal elasticity of substitution of working time.

Keywords: inflation; growth; wage-staggering; learning-by-doing; semi- parametric estimator (search for similar items in EconPapers)
JEL-codes: C14 E31 E51 E52 O42 (search for similar items in EconPapers)
Pages: 67
Date: 2010-05
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

Published in Macroeconomic Dynamics

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Related works:
Journal Article: INFLATION AND GROWTH IN THE LONG RUN: A NEW KEYNESIAN THEORY AND FURTHER SEMIPARAMETRIC EVIDENCE (2012)
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