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INFLATION AND GROWTH IN THE LONG RUN: A NEW KEYNESIAN THEORY AND FURTHER SEMIPARAMETRIC EVIDENCE

Published online by Cambridge University Press:  07 March 2011

Andrea Vaona
Andrea Vaona*
Affiliation:
University of Verona and Kiel Institute for the World Economy
*
Address correspondence to: Andrea Vaona, Department of Economic Sciences, University of Verona, Palazzina 32 Scienze Economiche—ex Caserma Passalacqua, Viale dell'Università 4, 37129 Verona, Italy; e-mail: [email protected].
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Abstract

This paper explores the influence of inflation on economic growth both theoretically and empirically. We propose to merge an endogenous growth model of learning by doing with a New Keynesian one with sticky wages. We show that the intertemporal elasticity of substitution of working time is a key parameter for the shape of the inflation–growth nexus. When it is set equal to zero, the inflation–growth nexus is weak and hump-shaped. When it is greater than zero, inflation has a sizable and negative effect on growth. Endogenizing the length of wage contracts does not lead to inflation superneutrality in the presence of a fixed cost of wage resetting. Adopting various semiparametric and instrumental-variable estimation approaches on a cross-country/time-series data set, we show that increasing inflation reduces real economic growth, consistent with our theoretical model with a positive intertemporal elasticity of substitution of working time.

Keywords

InflationGrowthWage StaggeringLearning by DoingSemiparametric Estimator
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Issue 1 , February 2012 , pp. 94 - 132
Copyright
Copyright © Cambridge University Press 2011

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