On the employment, investment and current account effects of inflation |
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Authors: | Arman Mansoorian Mohammed Mohsin |
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Institution: | a Department of Economics, York University, 4700 Keele Street, North York, Ontario, Canada M3J 1P3 b Department of Economics, University of Tennessee, Knoxville, TN 37996, USA |
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Abstract: | The effects of inflation targets are examined for a small open economy with cash in advance constraints. An increase in the inflation rate, by increasing the price of consumption relative to leisure, reduces consumption and labor supply. The fall in labor reduces the marginal productivity of capital, and a fall in investment. The country runs a current account surplus, despite the fall in output. The dynamics of the model for permanent and temporary policy changes are fully worked out, with the aid of a diagrammatic apparatus. Quantitative analysis of the model reveals substantial impact and steady state effects. |
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Keywords: | Employment Investment Current account Inflation Cash-in-advance |
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