Ination taxes and ination subsidies: Explaining the twisted relationship between ination and output
نویسنده
چکیده
This paper studies the nature of monetary policy with nancial intermediaries that provide loans for working capital in a cash-in-advance model with indivisible labor. Monetary policy occurs through money injections either directly to families or to nancial intermediaries. Injections to families produce an ination tax while injections directly to nancial intermediaries provide an ination subsidy that improves output, consumption, and welfare. This model helps explain why monetary policy based on growth in monetary aggregates can have ambiguous output e¤ects, why central bankers prefer interest rate rules to monetary aggregrate rules, and why estimated money demand equations tend to be unstable. JEL codes: E31, E50, E52 Keywords: Ination, output, working capital, monetary policy 1 Introduction The relationship between output and money (or ination) is not well understood. Even the data seem not to be clear about a relationship. Using long term data, McCandless and Weber [14] show that the relationship for OECD countries is that higher ination rates are correlated with higher output growth. However, when looking at Latin American countries they nd that higher ination rates are correlated with lower output growth. Econometric studies trying to nd Granger causal relationships between money and output have generated very mixed results. Sims [16] nds that money causes output but in later work (Sims [17]) nds that the Granger causal relationship pretty much disappears once interest rates are added to the VAR. The large literature on the instability of an estimated money demand equation (in which output is usually included) is further support on the complexity of the relationship. In spite of this empirical confusion, many central bankers operate as if money causes output and, speci cally, that appropriately timed money injections can
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