Effort, Productivity and Inflation

This paper examines the effect of inflation on effort and productivity in a representative agent model. We allow individual effort to be a continuous choice variable, which affects utility negatively and output positively. Our general model shows that the effect of inflation on effort, and hence on productivity, is ambiguous. We present an example where the effect is positive, thus demonstrating that a rise in inflation can have beneficial effects in terms of rising productivity, output and growth.