Growth and In‡ation in a Monetary “Selling-Cost” Model

This paper presents a simple monetary “selling-cost” model in the spirit of Dornbusch and Frenkel [1973] who assume that there are real costs in terms of resources to “delivering” output to consumers and that producers may reduce these transaction costs by accepting money in exchange for products. Within an exogenous growth framework, this assumption easily justi…es the existence of a negative relationship between i) in‡ation and growth in the short run and ii) in‡ation and output in the long run. Within an endogenous growth framework, this kind of transaction costs allows for multiple steady states when monetary authorities control the rate of money creation. Under a mild assumption concerning the speci…cation of the transaction costs, two stationary growth rates arise and the higher one is indeterminate. When indeterminacy occurs the monetary growth rate displays a positive impact on the balanced growth rate. Moreover the higher growth rate is recognized to be superior in terms of welfare. Eventually we investigate the role of monetary and …scal policy to coordinate agents and drive the economy towards virtuous growth rates.