University of HelsinkiAbstract. This paper examines the relationship between growth and inflation in an open economy where private agents can transfer resources abroad. To obtain endogenous growth, we assume that the international credit market is imperfect. We show that when the governments behave rationally growth and inflation rates should not be correlated, and the the optimal inflation rate can be found by setting the interest elasticity of money holdings equal to the tax elasticity of the tax base.
Professor Emeritus