Abstract
This paper analyzes the effects of an increase in the monetary growth ra te within a dynamic optimizing macroeconomic model. Both the short-ru n and long-run effects, and therefore the adjustments along the trans itional path, depend critically upon the tax structure and the firm's corresponding optimal financial decisions. With all bond financing, the effects depend upon the extent to which interest payments are tax deductible for corporations. If this is sufficiently high, the effec ts of an increase in the monetary growth rate are generally expansion ary. With low interest deductibility, or if the tax structure induces equity financing, the effects are generally contractionary. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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