Abstract

The article examines the long-run effects of inflation on capital stock and growth under the assumption of recursive time preferences when there exist pecuniary transaction costs alternatively affecting consumption or production. An increase in the rate of the nominal money supply growth raises capital intensity when transaction costs pertain to consumption, but results in an ambiguous effect on capital stock when real balances allow to save resources necessary for production. In both cases the optimal monetary growth coincides with the "full liquidity" rule of Friedman. The results obtained are compared to those derived under other approaches to "money and growth".