Inflation and Growth in an Open Economy

Abstract

This paper examines the relationship between growth and inflation in an open economy where private agents can transfer resources abroad. To obtain endogenous growth, we assume that the international credit market is imperfect. We show that when the governments behave rationally the growth and inflation rates should not be correlated, and that the optimal inflation rate can be found by setting the interest rate elasticity of money holdings equal to the tax rate elasticity of the tax base.

Real wages, inflation and labour productivity in Australia

“…Further, their causality test results imply that there is bi-directional causality between inflation and productivity for five countries while one-way causality exists for two countries. Christopoulos and Tsionas's (2005) application of panel cointegration techniques to 1 In addition to those discussed elsewhere in this paper the list includes: Geary (1976), Denny and May (1977), Gordon (1984Gordon ( , 1988, Buck and Fitzroy (1988), Crafts (1992), De Gregorio (1992, Sbordone and Kuttner (1994), Smyth (1995), Cameron et al (1996), Feijo (1997, Palokangas (1997), Hondroyiannis and Papapetrou (1998), Freeman and Yerger (2000), Blanchard and Katz (1999), Fountas et al (1999), Ghali (1999), Tsionas (2003b), Dritsakis (2004), L'horty and Rault (2004), Hsu (2005), Mahadevan and AsafuAdjaye (2006) and Bildirici and Alp (2008).…”

Inflationary Financing of Government Expenditure in an Endogenous Growth Model

“…One unit of transaction services is produced from one unit of the composite good. The transaction technology is the same as in Kimbrough (1986), De Gregorio (1993) and Palokangas (1997). The requirement for real transaction services, V , is an increasing function of real expenditure ck + k̇ , which consists of consumption ck and investment dot k̇ = dk / dt , and a non‐increasing function of the real level of money balances, M / p , which is the ratio of the money supply M and the price level p , V =𝒱( ck+k̇M/p ).…”

“…On the other hand, the papers that examine fiscal policy in the framework of economic growth usually ignore inflationary financing. 2 Palokangas (1997) considers inflation and growth in a model of public finance, ignoring the government's spending on services and investment. He assumes that taxes and seigniorage are needed only to finance interest on public debt.…”

Monetary Rules and Endogenous Growth in an Open Economy

“…The existing literature on monetary policy in open-economy models includes Palokangas (1997) and Shaw et al (2005). Palokangas (1997) analyzes the effect of an unanticipated increase in the nominal interest rate on the long-run economic growth rate. He finds that the result is ambiguous and depends on the relative magnitudes of the elasticity of money holdings with respect to the interest rate and the elasticity of output with regard to the tax rate.…”

“…They point out that money is economic growth-retarding in both the intermediate term and the long run. A common feature in Palokangas (1997) and Shaw et al (2005) is that they both focus on the effect of a single monetary rule and are silent on other important monetary rules that are currently implemented in many industrial and developing countries.…”