Inflation, welfare and public expenditures

Pedro Ferreira

No 431, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: This paper studies welfare effects of monetary policy in an overlapping generations model with capital and no form of taxation other than inflation. Public expenditures have a positive effect on labor productivity. The main result of the paper is that an expansive monetary policy can be welfare improving, at least for ìsmall enoughî inflation rates, and that there is an optimal inflation rate. Growth maximization, however, is never optimal. Steady-state capital and output increase with inflation, reproducing the so-called Tobin effect. For large inflation rates, however, the government authorities cannot affect real variables and there are only nominal effects.

Date: 2001-08-01
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:epgewp:431

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