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Inflation and Innovation-driven Growth

Peter Funk () and Bettina Kromen

No 16, Working Paper Series in Economics from University of Cologne, Department of Economics

Abstract: This paper models the relationship between inflation and steady state growth in a model combining standard Schumpeterian growth with a standard New Keynesian specification of nominal price rigidity. Positive money growth has two clear-cut countervailing effects on the incentive to innovate. Past price rigidity causes the use of an inefficiently large quantity of cheap old intermediate goods, reducing demand for new ones and hence, the incentive to innovate. Future price rigidity erodes the new good’s relative price, increasing demand and therefore the current incentive to innovate. In numerical calibrations the negative effect of inflation on growth dominates.

Keywords: Inflation; endogenous growth; price rigidity (search for similar items in EconPapers)
JEL-codes: E31 O30 O42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-mac and nep-mon
Date: 2005-02-15
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Journal Article: Inflation and Innovation-Driven Growth (2010) Downloads
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