A Hump-Shaped Relationship between Inflation and Endogenous Growth

Abstract

This study explores the relationship between inflation and economic growth using a transaction costs model with a socially determined discount rate and a linear production technology. Even when the labor decision is inelastic, this study demonstrates that inflation affects balanced growth path (BGP) with nonconstant time preferences. In particular, if the degree of impatience in- creases in the economy-wide average ratio of general assets (a weighted sum of capital and money) to consumption, then a certain rate of money supply can achieve maximized endogenous growth. The numerical examples demonstrate a hump-shaped relationship between inflation and BGP, but the impact is quantita- tively small.