Monetary Expansion and Productive Public Expenditure in A Cash-In-Advance Economy

Using a dynamic optimization model that incorporates a cash-in-advance constraint on both consumption and investment and productive public capital financed by a lump-sum tax and seigniorage, this paper analyses the steady-state effects of an increase in the inflation rate (the money growth rate) on output, private capital and welfare. The effects are negative at high inflation rates. However, at low inflation rates, the effects depend on the amount of lump-sum tax revenue collected and therefore are either positive or negative.