In this article, we argue that inflation increases complexity pertaining to knowledge
production (or R&D). Then, we expand a recently developed complexity index based
on entropy to include the effect of inflation. As a result of this new mechanism in an
endogenous growth model, inflation is no longer superneutral. In the model, inflation
can decrease economic growth in a nonlinear way, a sudden upward shock on inflation
can severely hurt economic growth and an inflation cut can be responsible for a take-off.
These effects are illustrated quantitatively.
