Money,inflation, and optimal economic growth

Using a two-asset model of a growing competitive economy, it is shown that the optimal growth path can be achieved via a policy operating exclusively on the rate of growth of the money stock.     

Money and inflation: a reply

The aim of this note is to reply to John Gibson's comments in the current issue of this journal on my paper titled ’Money and inflation: the case of western developed countries, 1960–80’ published in Applied Economics 1990, 22 863–9.     

Money,inflation, and maximizing behavior: The case of many countries

This paper examines a world which is composed of countries each inhabited by a population of farsighted overlapping generations and in which the only assets are the national currencies that grow at constant proportional rates. It is shown that the world economy is unstable in the sense that, away from the steady state, either the real value of each country's stock of money goes to zero or the world monetary system eventually collapses. It is also shown that the dynamic paths of the price level and the real stock of money in each country may move nonmonotonically over time.     

Money and inflation in Germany: A cointegration analysis

This paper analyses the relation between money and inflation in Germany in a cost-push/demand-pull model of an open small economy by means of cointegration methods. The full-information-maximum-likelihood method of Johansen as well as structural methods are applied to datasubsets and the full data set. The focus of the paper is on tests for overidentifying restrictions and for weak and strong exogeneity within these data sets. The result of the paper is that the money stock, the price level and gross national product are endogenous whereas the interest rate and the real import price are both weakly and strongly exogenous. By means of the price cointegration relation we illustrate how monetary targeting should react to imported inflation.     

Money,inflation, and causality in the North African Countries: An empirical investigation

This paper tests the monetarist model of inflation in the case of the North African developing economies using the quarterly data over the period 1960 through 1980. The inflation model estimated in this paper takes into account the role of foreign interest rates in the inflationary process, determines rather than assumes the appropriate lag structure, and explores the issue of the direction of causality. The empirical results indicate that the monetarist model adequately explains the inflationary process in the countries examined.     

A common trends model of UK core inflation

In this paper the long-run trend in RPI inflation (core inflation) for the UK over the 1961–1997 period is estimated within the framework of a multivariate common trends model which extends the bivariate VAR approach of Quah and Vahey (1995). In this context core inflation is directly linked to money and wage growth and interpreted as the long-run forecast of inflation from a small-scale, cointegrated macroeconomic system. First version received: September 1999/Final version received: October 2001 RID="*" ID="*"  We thank two anonymous referees for many helpful comments and suggestions. Work on this paper was partially conducted when C. Morana was at Heriot-Watt University.     

Corruption, inflation and growth

We present a model in which the embezzlement of tax revenues by public officials leads the government to rely more on seigniorage to finance its expenditures. This raises inflation which depresses investment and growth via a cash-in-advance constraint.     

Search, Money, and Prices

It is well known that models in which money is used as a medium of exchange to lubricate trading, frictions display multiplicity of equilibria. I show that the amount of activity varies as the value of money differs across these equilibria when production opportunities involve random fixed costs. When money has high value, trade is more profitable; therefore, there will be more agents engaged in trade relative to equilibria in which money has lower value. The higher-activity equilibria display higher production not only because more is produced and exchanged per transaction but also because more transactions occur per period. This Diamond-style result is obtained without increasing returns in the matching technology.     

Bargains,Barter, and Money

We examine a search money model in which there is a symmetric coincidence of wants in all barter matches. However, when bargaining outcomes are asymmetric across matches, the barter economy is inefficient. Then a robust monetary equilibrium exists provided that money holders enjoy adequate bargaining terms. Fiat money may be welfare improving. In contrast to the literature, it is the asymmetry in bargains across matches rather than asymmetry in demands that generates these results. Journal of Economic Literature Classification Numbers: C78, E40.     

Currency substitution,inflation, and welfare

Currency substitution affects the mapping between social welfare and inflation by altering the underlying money demand function and influencing interest rates. In order to explore the essence of this effect, I build a model with working capital under which foreign currency is substituted with the less liquid components of domestic money. The framework closely mimics the actual pattern of currency substitution across varying rates of inflation and enables the study of an additional channel that works through the impact of currency substitution on interest rates. It is found that there is a threshold inflation rate, which turns out to be 44% under baseline calibration, below which currency substitution decreases welfare and vice versa. A practical implication is that, at inflation rates lower (greater) than the threshold, the potential welfare gains from disinflation to a near-zero inflation rate are higher (lower) if there is currency substitution than otherwise.     

Endogenous money,inflation, and welfare

This paper addresses the classic question: what are the welfare costs of inflation. We employ a model in which the ratios of currency to deposits and currency to reserves are endogenously determined. The model distinguishes quantitatively between three sources of welfare cost of inflation, and provides further estimates for potential welfare gains from improvements in transaction technologies. Estimates of the marginal cost of public funds associated with the inflation tax are compared both with that of labor taxation within the model and with those reported in the public finance and macro literature. We conclude that not only is inflation an inefficient source of government revenue, but also that, in the absence of lump-sum taxation, deflationary policies may be highly inefficient.     

Openness, income-tax progressivity, and inflation

This paper considers a model of an open economy in which the degree of income-tax progressivity influences the interaction among openness, central bank independence, and the inflation rate. Our model suggests that an increase in the progressivity of the tax system induces a smaller response in real output to a change in the price level. This implies that increased income-tax progressivity reduces the equilibrium inflation rate and that the effect of increased income-tax progressivity on inflation is smaller when the central bank places a higher weight on inflation or when there is greater openness. Examination of cross-country inflation data provides empirical support for these key predictions.