This paper analyzes the effects of inflation variability on economic growth
in a model where money is introduced via a cash-in-advance constraint. In
this setting, we find that inflation adversely affects long-run growth, eve
n when the cash-in-advance constraint applies only to consumption. At the s
ame time, we find that inflation and growth are positively related in the s
hort run. Furthermore, variability increases average growth through a preca
utionary savings motive. Since inflation and inflation variability tend to
be highly correlated, the presence of uncertainty attenuates the negative l
ong-run relationship between inflation and real growth. It also provides a
partial rationale for the apparent lack of robustness in cross-country regr
essions of growth and inflation, (C) 2000 Elsevier Science B.V. All rights
reserved. JEL classification: E13; O42.