Long-Run Impacts of Inflation Tax in the Presence of Multiple Capital Goods

This paper examines the long-run impact of inflation tax in the context of a generalized Ak growth model in which the production technology uses two types of capital stocks under a constant-returns-to-scale technology. We find hat unless investment expenditure for each type of capital is subject to the same degree of cash-in-advance constraint, a change in the money growth rate affects the steady-state level of factor intensity. It is shown that if the balanced-growth path is uniquely given, we still have a negative long-run relationship between money growth and the growth rate of real income. However, due to the endogenous determination of the factor intensity, the negative relation between the velocity of money and the rate of inflation may not be established.