Growth, inflation, and economic policy in a stochastic cash-in-advance economy

Seppo Honkapohja and Urho Lempinen
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Urho Lempinen: Currency Derivatives Ltd, Finland

Finnish Economic Papers, 1997, vol. 10, issue 2, 51-66

Abstract: We develop a continuous-time stochastic growth model with recursive preferences, money and public debt. In equilibrium growth and inflation follow geometric Brownian motions, with parameters determined by solving a system of nonlinear equations. Permanent changes in government expenditures and taxes have both real and nominal effects producing often reverse Mundell-Tobin effects. Superneutrality holds when money supply changes are caused by open market operations, irrespective of the primary fiscal stance. The magnitude of the policy effects are examined using a calibrated version of the model.

JEL-codes: E63 H63 (search for similar items in EconPapers)
Date: 1997
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Persistent link: https://EconPapers.repec.org/RePEc:fep:journl:v:10:y:1997:i:2:p:51-66

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