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Money and random matching in an endogenous growth model

Chu, Angus C. and Lai, Ching-Chong and Liao, Chih-Hsing (2012): Money and random matching in an endogenous growth model.

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Abstract

In this study, we develop a search-based monetary growth model to analyze the effects of inflation on economic growth and social welfare by introducing endogenous economic growth via capital externality into a two-sector search model. We �find that the channel through which inflation affects economic growth in the search model is different from the cash-in-advance model. In the quantitative analysis, we evaluate the welfare effect of inflation in the search-based endogenous growth model and compare it to a search-based exogenous growth model. We �find that the welfare effect of inflation is nonlinear in the endogenous growth model whereas it is linear in the exogenous growth model. Furthermore, we find that the welfare cost of inflation under endogenous growth is about three times as large as the welfare cost under exogenous growth.

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