The Effects of Inflation Taxation on Resource Allocation and Welfare in Iran's Economy: Presentation of a Neoclassical Endogenous Growth Model with Leisure and Production Externality

Document Type : Research Paper


1 Assistant Professor of Economics, Faculty of Economics and Political Sciences, Shahid Beheshti University

2 Associate Professor of Economics, Faculty ofAdministrative SciencesandEconomics, University of Isfahan

3 Professor of Economics, Faculty ofAdministrative SciencesandEconomics, University of Isfahan


How inflation taxation affects resource allocation and welfare has received a great deal of attention. So far, this debate has been controversial. In this paper we examine how nominal money growth as a means of public finance affects resource allocation and welfare in a neoclassical endogenous growth model with leisure and money in the utility function and production externality. The present study is different from other studies in two aspects: first, in a dynamic optimization model, equations related to consumption and real money balances relative to GDP, leisure, capital stock, production and welfare level in a steady state extracted in form of the parameters in model. Second, for each of them, derives sensitivity analysis regarding the rate of inflation tax.
The results obtained from sensitivity analysis indicate that in a steady state without externality of production, by increasing inflation tax rate, the ratio of consumption to GDP remains constant, but increase labor, capital stock and production. With decrease the ratio of real money balances to GDP and leisure, the level of social welfare in steady state decreases. Considering production externality, capital stock and production increase more rapidly, welfare level in steady state increases.


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