A Simple Analytical Model of the Adverse Real Effects of Inflation

Eduardo BastianMark Setterfield
Written By SCEPA

WORKING PAPER

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The essential insight advanced in this paper is that the claim that inflation can impair growth makes most sense in the context of a monetary production economy.

We construct a model of inflation and growth that distinguishes between the properties of various qualitatively different inflation regimes. It is then shown how some of these regimes, by undermining confidence in various nominal contracts that are central to the process of accumulation in a monetary production economy, can adversely affect growth.

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