Endogenous inflationary finance and long-run growth

This paper examines the effects of money financing of deficits on capital accumulation and growth in a framework where inflationary finance is determined endogenously through a dynamic game between an optimising central bank which attempts to minimise the inflation-tax and a rational private sector, and this in turn determines the long-run growth rate of the economy. We use dynamic programming to derive the time-consistent equilibrium, which has intuitive properties. Our results indicate clearly that the inflation tax and the long-run growth rate are negatively related.