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Mitigating the Growth-Effects of Inflation through Financial Development

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  • Bose Niloy

    ()
    (University of Wisconsin-Milwaukee)

  • Murshid Antu P

    ()
    (University of Wisconsin-Milwaukee)

Abstract

This paper examines the growth-effects of inflation at alternative stages of financial development. We propose an endogenous growth model where intermediated savings generate capital. Informational problems cause banks to ration credit and hold liquid assets offering (real) returns that vary inversely with inflation. Inflation therefore acts like a tax on capital accumulation. However financial development lessens credit-rationing, which reduces the demand for these liquid assets and softens the incidence of the inflation tax. Sizeable and statistically significant interactions between inflation and measures of financial development in cross-country and panel regressions provide empirical support for our model.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 8 (2008)
Issue (Month): 1 (February)
Pages: 1-27

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Handle: RePEc:bpj:bejmac:v:8:y:2008:i:1:n:8

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Cited by:
  1. Huang, Ho-Chuan & Lin, Shu-Chin & Kim, Dong-Hyeon & Yeh, Chih-Chuan, 2010. "Inflation and the finance-growth nexus," Economic Modelling, Elsevier, vol. 27(1), pages 229-236, January.

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