Inflation, factor substitution and growth

  • Recent empirical studies on the inflation-growth-relationship underline that inflation has negative growth effects already under relatively modest rates. Most contributions to monetary growth theory, however, have difficulties in explaining such a pattern. It is shown in this paper that this problem can be overcome by establishing a link between monetary instability and the aggregate elasticity of factor substitution. Several microeconomic justifications can be found for a negative influence of inflation on factor substitution. It turns out that already in a simple neoclassical monetary growth model this effect is usually strong enough to question the superneutrality benchmark result in the steady state and to dominate all potential positive effects of inflation along the convergence path. In a more general perspective the paper contributes to a better integration of institutional change in aggregate models of economic growth.

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Author:Rainer KlumpORCiDGND
Parent Title (German):European Central Bank: Working paper series ; No. 280
Series (Serial Number):European Central Bank: Working paper series (280)
Publisher:Europ. Central Bank
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2003
Year of first Publication:2003
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2014/03/20
Tag:CES production functions; Monetary growth models; convergence; inflation; neo-classical growth
GND Keyword:Monetäre Wachstumstheorie; Inflation; CES-Funktion; Neoklassische Theorie; Aufholprozess; Nachholende Entwicklung
Page Number:45 S.
© European Central Bank, 2003. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. The views expressed in this paper do not necessarily reflect those of the European Central Bank.
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht