Endogenous growth and the welfare costs of inflation: A reconsideration

Abstract

Many economists share the view that the welfare costs of moderate rates of money growth-cum-inflation are generally modest or small. This paper investigates the sensitivity of this result to alternative model specifications and behavioral assumptions. We first construct a monetary endogenous growth model with Romer's (1986) style of capital externality, and find that the real growth rate effect is substantially large, thus lending to much higher welfare costs than those in existing studies. To investigate the robustness of the result, we then conduct a series of experiments, by exploring the Romer model with an alternative specification of money demand and a class of other endogenous growth models. It is demonstrated, quite consistently, that our finding is confirmed in these models. © 1998 Elsevier Science B.V. All rights reserved.