Inflation, Economic Growth and Education Expenditure

Abstract Recent evidence shows that different inflation rates have effects on long-run economic growth. We follow the increasing interest in the issue offering a new explanation for the influence of monetary policy on economic growth: cash requirements for households expenditures in education. We devise an endogenous growth model with Cash-in-Advance constraints in several sectors (education, horizontal R&D, vertical R&D, manufacturing and consumption) and study its steady-state and transitional dynamics. In particular, the Cash-in-Advance constraint in education expenditures of households is essential to obtain a negative relationship between inflation and economic growth on the long run. Quantitatively, this monetary endogenous growth model replicates both the small influence of monetary policy on growth, while highlights the effects it can have on welfare and allocations of resources in different sectors in the economy.