Inflation, Transaction Costs and Indeterminacy in Monetary Economies with Endogenous Growth

Abstract

This paper investigates the relationship between inflation (the rate of monetary expansion) and economic growth in a monetary version of Benhabib and Farmer's ( Journal of Economic Theory , 63 , 19–41, 1994) one‐sector endogenous growth model, in which money reduces transaction costs or shopping time. It is shown that when labour externalities are large there may be dual steady states, one of which is indeterminate and the other is determinate, and that the Tobin effect in the growth rate sense (i.e. higher rates of inflation increase the growth rate of the economy) always emerges in either of the steady states depending on the properties of a transaction cost technology.