Trend inflation, nominal rigidities, and endogenous growth

Thomas Carter, Kevin Moran and Robert Amano

No 364, 2010 Meeting Papers from Society for Economic Dynamics

Abstract: profits in turn reduces the return to innovation, and a link between inflation and the growth rate emerges. We explore this relationship, relate it to the empirical literature on the growth-inflation connection, and quantify its welfare implications. In particular, we show that the costs of positive trend inflation are substantial. Furthermore, we consider two extensions to environments where these costs are especially pronounced, namely (i) the case where nominal rigidities exist in the labour market and (ii) the case of endogenous growth a la Benhabib, Perli and Xie (1994), where new varieties can complement pre-existing ones. We believe that our focus on nominal price rigidity is novel, as the existing theoretical literature on the link between trend inflation and growth mostly focuses on the trade-off between money holdings and other forms of saving.

Date: 2010
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