Money, habits and growth

The money-in-utility model is re-considered with habits and endogenous growth. An increase in the inflation rate requires a fall in the steady state habits relative to capital, if initially the nominal interest rate is positive. If habits exhibit adjacent complementarity, immediately after the increase in the inflation rate savings and investment fall, reducing the growth rate. However, the long-run growth rate is not affected by the policy change. The long-run level of capital would be lower than it would have been had there been no increase in the inflation rate. These predictions are supported by our empirical evidence, and also reconcile some recent empirical evidence on inflation and growth.