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Long-run relationship between inflation and growth in a New Keynesian framework

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  • Arato, Hiroki

Abstract

This paper examines the steady-state growth effect of inflation in an endogenous growth model in which the Calvo-type nominal rigidity with endogenous contract duration and monetary friction via wage-payment-in-advance constraint are assumed. On the balanced-growth path in this model, the marginal growth effect of inflation is weakly negative or even positive at low inflation rates because the effect on average markup offsets the negative marginal growth effect through the monetary friction but the growth effect of inflation is negative and convex at higher inflation rates because the frequency of price adjustment approaches that of the flexible-price economy and the growth effect through the nominal rigidity is dominated by the growth effect through the monetary friction. With a plausible calibration of the structural parameters, this model generates a relationship between inflation and growth that is consistent with empirical evidence, especially in industrial countries.

Suggested Citation

  • Arato, Hiroki, 2008. "Long-run relationship between inflation and growth in a New Keynesian framework," MPRA Paper 11388, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:11388
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    References listed on IDEAS

    as
    1. Max Gillman & Michal Kejak, 2005. "Contrasting Models of the Effect of Inflation on Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 19(1), pages 113-136, February.
    2. Levin, Andrew & Yun, Tack, 2007. "Reconsidering the natural rate hypothesis in a New Keynesian framework," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1344-1365, July.
    3. Peter Funk & Bettina Kromen, 2006. "Short-term price rigidity in an endogenous growth model: Non-Superneutrality and a non-vertical long-term Phillips-curve," Working Paper Series in Economics 29, University of Cologne, Department of Economics.
    4. Fu-Sheng Hung, 2008. "Non-productive consumption loans and threshold effects in the inflation-growth relationship," Oxford Economic Papers, Oxford University Press, vol. 60(2), pages 318-342, April.
    5. Max Gillman & Mark N. Harris, 2010. "The effect of inflation on growth," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 18(4), pages 697-714, October.
    6. Niloy Bose, 2002. "Inflation, the credit market, and economic growth," Oxford Economic Papers, Oxford University Press, vol. 54(3), pages 412-434, July.
    7. Hiroki Arato, 2009. "Long-run relationship between inflation and growth in a New Keynesian framework," Economics Bulletin, AccessEcon, vol. 29(3), pages 1863-1872.
    8. By Mohsin S. Khan & Abdelhak S. Senhadji, 2001. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 1-1.
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    Cited by:

    1. Oikawa, Koki & Ueda, Kozo, 2018. "The optimal inflation rate under Schumpeterian growth," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 114-125.
    2. Hiroki Arato, 2009. "Long-run relationship between inflation and growth in a New Keynesian framework," Economics Bulletin, AccessEcon, vol. 29(3), pages 1863-1872.
    3. Oikawa, Koki & Ueda, Kozo, 2019. "Short- and long-run tradeoff of monetary easing," Journal of the Japanese and International Economies, Elsevier, vol. 52(C), pages 189-200.
    4. Basu, Parantap & Sarkar, Agnirup, 2016. "Partial inflation indexation and long-run inflation targeting in a growing economy: A comparison of Calvo and Rotemberg pricing models," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 293-306.

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    More about this item

    Keywords

    Inflation and growth; Sticky prices; Endogenous contract duration;
    All these keywords.

    JEL classification:

    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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