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Inflation, financial markets and long-run real activity

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  • Huybens, Elisabeth
  • Smith, Bruce D.

Abstract

Empirical evidence suggest that real activity, the volume of bank lending activity, and the volume of trading in equity markets are strongly positively correlated. At the same time. inflation and the volume of financial market activity are strongly negatively correlated (in the long-run), as are inflation and the real rate of return on equity. Inflation anr real activity are also negatively correlated in the long-run, particularly for economies with relatively high rates of inflation. We present a monetary growth model in which banks and secundary capital markets play a crucial allocative function. We show that - at least under certain configurations of parameters - the predictions of the model are consistent with these and several other observations about finance, inflation and long-run real activity.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 43 (1999)
Issue (Month): 2 (April)
Pages: 283-315

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Handle: RePEc:eee:moneco:v:43:y:1999:i:2:p:283-315

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  2. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
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  18. repec:fth:wobaco:1083 is not listed on IDEAS
  19. Champ, B. & Smith, B.D., 1991. "Currency Elasticity and Banking Panics: theory and Evidence," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9109, University of Western Ontario, The Centre for the Study of International Economic Relations.
  20. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  21. Elisabeth Huybens & Bruce D. Smith, 1996. "Financial Market Frictions, Monetary Policy and Capital Accumulation in a Small Open Economy," Working Papers 9608, Centro de Investigacion Economica, ITAM.
  22. Atje, Raymond & Jovanovic, Boyan, 1993. "Stock markets and development," European Economic Review, Elsevier, vol. 37(2-3), pages 632-640, April.
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