Price Rigidities, Inflationary Finance and Long-run Growth*

The paper considers a monopolistically competitive intertemporally optimizing monetary economy featuring long-term growth. Inflation is generated through sluggish price-setting and contributes to budgetary finance through seignorage. This setup permits exploration of the interaction between inflation and growth in a tractable way. Superneutrality holds in the long but not the short run. The budget deficit fuels inflation with a hysteresis. Growth and inflation are negatively correlated in the long run, with causality running from the former to the latter, and positively correlated in the short run regardless of the origin of shocks. Price flexibility precipitates adjustment but appears also to destabilize output.