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Real Effects of Money Growth and Optimal Rate of Inflation in a Cash-in-Advance Economy with Labor-Market Frictions
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Real Effects of Money Growth and Optimal Rate of Inflation in a Cash-in-Advance Economy with Labor-Market Frictions
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Journal Article
Real Effects of Money Growth and Optimal Rate of Inflation in a Cash-in-Advance Economy with Labor-Market Frictions
2013
Overview
This paper studies the consequences of labor-market frictions for the real effects of steady inflation when cash is required for households' consumption purchases and firms' wage payments. Money growth may generate a positive real effect by encouraging vacancy creation and raising job matches. This may result in a positive optimal rate of inflation, particularly in an economy with moderate money injections to firms and with nonnegligible labormarket frictions in which wage bargains are not efficient. This main finding holds for a wide range of money injection schemes, with alternative cash constraints, and in a second-best world with preexisting distortionary taxes.
