Abstract:
Using a new approach, we reexamine the empirical evidence on the long-term interactions between
inflation and real variables. We find, using over 100 years of U.S. data, that in the long run the effect
of inflation on investment and output is positive (a "Tobin type effect") and the investment rate, and
hence the real interest rate, are not independent of inflation. However, over the full sample at least,
the variability of the innovations to the stochastic inflation trend is small relative to the
variability of the innovations to the productivity and fiscal trends. We conclude that models
generating a reverse-Tobin effect, including standard real-business-cycle and endogenous growth
models that incorporate money, may not be the best models for understanding the long-term real
effects of inflation.
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