Inflationary financing of public investment and economic growth

A theoretical model is constructed in order to explain particular historica l experiences in which inflation acceleration apparently helped to spur a p eriod of economic growth. Government financed expenditures affect positivel y the productivity growth in this model so that the distortionary effect of inflation tax is compensated by the productive effect of public expenditur es. We show that for some interval of money creation rates there is an equi librium where money is valued and where steady state physical capital grows with inflation. It is also shown that zero inflation and growth maximizati on are never the optimal policies. (C) 1999 Elsevier Science B.V. All right s reserved.