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Inflation, Liquidity, And Long-Run Growth

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  • Zhou, Ge

Abstract

This paper revisits the long-run relationship between inflation and economic growth by exploring the impact of inflation on investment. I illustrate that inflation may have a positive effect on growth by mitigating the liquidity risks of investment projects. Together with the traditional effect of the “inflation tax” on investment, a hump-shaped relationship between inflation and economic growth can be obtained in a calibrated model, which is consistent with the US postwar data. Sensitivity analysis suggests that the degree of financial development and the magnitude of the aggregate liquidity demand help explain the mixed empirical findings.

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  • Zhou, Ge, 2019. "Inflation, Liquidity, And Long-Run Growth," Macroeconomic Dynamics, Cambridge University Press, vol. 23(2), pages 888-906, March.
    • Handle: RePEc:cup:macdyn:v:23:y:2019:i:02:p:888-906_00
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    Cited by:

    1. Jamus Jerome Lim, 2021. "The limits of central bank independence for inflation performance," Public Choice, Springer, vol. 186(3), pages 309-335, March.
    2. Shah, Syed Ale Raza & Naqvi, Syed Asif Ali & Riaz, Sabahat & Anwar, Sofia & Abbas, Nasir, 2020. "Nexus of biomass energy, key determinants of economic development and environment: A fresh evidence from Asia," Renewable and Sustainable Energy Reviews, Elsevier, vol. 133(C).

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