The Inflation Tax in a Convex Model of Equilibrium Growth

A general equilibrium monetary economy is described that exhibits equilibrium growth. The production technology is consistent with Jones and Manuelli (1990) and Rebelo (1991). The inflation tax and nominal interest rates are shown to be inversely related to the equilibrium growth rates of real varia...

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Bibliographic Details
Published in:Economica (London) 1995-02, Vol.62 (245), p.109-121
Main Authors: Marquis, Milton H., Reffett, Kevin L.
Format: Article
Language:English
Subjects:
Economic development
Economic growth
Economic growth models
Economic growth rate
Economic models
Equilibrium
General economic equilibrium
Growth models
Inflation
Inflation rates
Inflation tax
Interest rates
Investment
Long run economic growth
Monetary policy
Monetary theory
Studies
Taxation
Taxes
Welfare losses
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Summary:A general equilibrium monetary economy is described that exhibits equilibrium growth. The production technology is consistent with Jones and Manuelli (1990) and Rebelo (1991). The inflation tax and nominal interest rates are shown to be inversely related to the equilibrium growth rates of real variables until a critical point is reached. At this point, equilibrium growth is eliminated and the predictions of Stockman (1981) and Abel (1985) concerning the `level effects' of distortionary monetary policies appear. For the nominal side of the model, a version of the prediction of Friedman (1969) is shown to hold for a particular balanced growth path. Following King and Rebelo (1990), a linear growth version of the model is calibrated to illustrate the potentially large growth and welfare effects of moderate inflations.
ISSN:0013-0427
1468-0335
DOI:10.2307/2554778