Long-Run Impacts of Inflation Tax in the Presence of Maintenance Expenditures

Abstract

This paper examines the long-run impact of inflation tax in the context of a generalized Ak growth model in which the rate of capital depreciation is endogenously determined. We assume that the rate of capital depreciation positively depends on capital utilization rate and negatively depends on maintenance expenditures. Money is introduced via a cash-in-advance constraint that may apply to the maintenance expenditures as well as to consumption and investment spendings. We find that the long-run effects of inflation tax are more complex than those obtained in the monetary Ak growth model with a fixed capital depreciation rate. In particular, the relation between inflation and growth is highly sensitive to the specification of the capital depreciation technology as well as to the forms of cash-in-advance constraints.