Money, Random Matching and Endogenous Growth: A Quantitative Analysis

Chu, Angus C. and Kan, Kamhon and Lai, Ching-Chong and Liao, Chih-Hsing (2013): Money, Random Matching and Endogenous Growth: A Quantitative Analysis.

Abstract

In this study, we develop a search-and-matching 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-and-matching model. We find that the channel through which inflation affects economic growth in the search-and-matching model is different from the traditional cash-in-advance model. To facilitate the calibration, we obtain an empirical estimate of the effects of inflation on economic growth using panel regressions. In the simulation analysis, we quantitatively evaluate the welfare effect of inflation in the search-and-matching endogenous growth model and compare it to a search-and-matching 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 up to four times as large as the welfare cost of inflation under exogenous growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: economic growth; inflation; money; random matching
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O42 - Monetary Growth Models; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money

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