Working Paper: NBER ID: w1235
Authors: Stanley Fischer
Abstract: Models of inflation and growth in the sixties emphasized the portfolio substitution mechanism by which higher inflation made capital more attractive to hold relative to money, leading to higher capital intensity, and in the transition period to higher growth.The empirical evidence, however, is that growth and inflation are negatively correlated. Reasons for this negative correlation are investigated, and then embodied in a simple monetary maximizing model. Higher inflation is associated with lower growth because lower real balances reduce the efficiency of factors of production, and because there may be a link between government purchases and the use of the inflation tax. Comparative steady states and comparative dynamics is analyzed and the generally negative association between inflation and growth, both in steady states and in transition processes, is demonstrated.
Keywords: inflation; economic growth; portfolio substitution; monetary policy
JEL Codes: E31; E32; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher inflation (E31) | lower real balances (E49) |
| lower real balances (E49) | reduced efficiency of production factors (D24) |
| higher inflation (E31) | reduced efficiency of production factors (D24) |
| government purchases financed by inflation (E62) | inflation-growth relationship (O42) |
| higher inflation (E31) | portfolio shift from money to capital (G11) |
| portfolio shift from money to capital (G11) | increased capital intensity (E22) |
| increased capital intensity (E22) | potential growth in transition process (O49) |
| higher inflation (E31) | higher growth rates of output (O40) |
| higher inflation (E31) | negative correlation with growth (O44) |
| higher inflation (E31) | no significant positive correlation with growth (O49) |