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Real effects of money growth and optimal rate of inflation in a cash-in-advance economy with labor-market frictions

Ping Wang () and Danyang Xie

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies the consequences of labor-market frictions for the real effects of steady inflation when cash is required for households' consumption purchases and firms' wage payments. Money growth may generate a positive real effect by encouraging vacancy creation and raising job matches. This may result in a positive optimal rate of inflation, particularly in an economy with moderate money injections to firms and with nonnegligible labor-market frictions in which wage bargains are not efficient. This main finding holds for a wide range of money injection schemes, with alternative cash constraints, and in a second-best world with pre-existing distortionary taxes.

Keywords: Cash Constraints; Nonsuperneutrality of Money; the Friedman rule; Labor-Market Frictions (search for similar items in EconPapers)
JEL-codes: D90 E41 O42 (search for similar items in EconPapers)
Date: 2012-10-29
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
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Related works:
Journal Article: Real Effects of Money Growth and Optimal Rate of Inflation in a Cash-in-Advance Economy with Labor-Market Frictions (2013) Downloads
Journal Article: Real Effects of Money Growth and Optimal Rate of Inflation in a Cash‐in‐Advance Economy with Labor‐Market Frictions (2013) Downloads
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