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Money, random matching and endogenous growth: A quantitative analysis

Angus Chu (), Kamhon Kan (), Ching-chong Lai and Chih-Hsing Liao

Journal of Economic Dynamics and Control, 2014, vol. 41, issue C, 173-187

Abstract: In this study, we develop a search-and-matching monetary growth model to analyze the effects of inflation on economic growth and social welfare by introducing endogenous economic growth via capital externality into a two-sector search-and-matching model. We find that the channel through which inflation affects economic growth in the search-and-matching model is different from the traditional cash-in-advance model. To facilitate the calibration, we obtain an empirical estimate of the effects of inflation on economic growth using panel regressions. In the simulation analysis, we quantitatively evaluate the welfare effect of inflation in the search-and-matching endogenous growth model and compare it to a search-and-matching exogenous growth model. We find that the welfare effect of inflation is nonlinear in the endogenous growth model whereas it is linear in the exogenous growth model. Furthermore, we find that the welfare cost of inflation under endogenous growth is up to four times as large as the welfare cost of inflation under exogenous growth.

Keywords: Economic growth; Inflation; Money; Random matching (search for similar items in EconPapers)
JEL-codes: E41 O41 O42 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Search and endogenous growth: when Romer meets Lagos and Wright (2012) Downloads
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