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Inflation, economic growth and education expenditure

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  • Sequeira, Tiago Neves

Abstract

Recent evidence shows that different inflation rates have effects on long-run economic growth. We follow the increasing interest in the issue offering a new explanation for the influence of monetary policy on economic growth: cash requirements for household expenditures in education. We devise an endogenous growth model with cash-in-advance (CIA) constraints in several sectors (education, horizontal R&D, vertical R&D, and manufacturing and consumption) and study its steady-state and transitional dynamics. In particular, the CIA constraint in education expenditures of households is essential to obtain a negative relationship between inflation and economic growth on the long- run. Quantitatively, this monetary endogenous growth model replicates both the small influence of monetary policy on growth, while highlighting the effects it can have on welfare and the allocation of resources in different sectors in the economy.

Suggested Citation

  • Sequeira, Tiago Neves, 2021. "Inflation, economic growth and education expenditure," Economic Modelling, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:ecmode:v:99:y:2021:i:c:s026499932100050x
    DOI: 10.1016/j.econmod.2021.02.016
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    References listed on IDEAS

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    More about this item

    Keywords

    Endogenous economic growth; Inflation; Interest rate; Monetary policy; Cash-in-advance (CIA);
    All these keywords.

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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