NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Monetary Growth, Inflation, and Economic Activity in a Dynamic Macro Model

Stephen J. Turnovsky

NBER Working Paper No. 2133 (Also Reprint No. r1062)
Issued in 1987
NBER Program(s):   ME

This paper analyzes the effects of an increase in the monetary growth rate within a dynamic optimizing macroeconomic model. Both the short-run and long-run effects, and therefore the adjustments along the transitional path, depend critically upon the tax structure and the firm's corresponding optimal financial decisions. With all bond financing, the effects depend upon the extent to which interest payments are tax deductible for corporations. If this is sufficiently high, the effects of an increase in the monetary growth rate are generally expansionary. With low interest deductibility, or if the tax structure induces equity financing, the effects arc generally contractionary.

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Document Object Identifier (DOI): 10.3386/w2133

Published: Turnovsky, Stephen J., "Monetary Growth, Inflation, and Economic Activity in a Dynamic Macro Model," International Economic Review, Vol. 28, No. 3, October 1987.

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