Endogenous inflationary finance and long‐run growth

This paper examines the effects of money financing of deficits on capital accumulation and growth in a framework where inflationary finance is determined endogenously through a dynamic game between an optimising central bank which attempts to minimise the inflation‐tax and a rational private sector, and this in turn determines the long‐run growth rate of the economy. We use dynamic programming to derive the time‐consistent equilibrium, which has intuitive properties. Our results indicate clearly that the inflation tax and the long‐run growth rate are negatively related.