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Revisiting Inflation-Growth Nexus: An Endogenous Growth Model With Financial Frictions

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  • FA-HSIANG CHANG

    (College of Business and Public Management, Wenzhou Kean University, Wenzhou, P. R. China)

  • LIN ZHANG

    (��ICFS, Southwestern University of Finance and Economics, Chengdu, P. R. China)

Abstract

This paper presents a new explanation of why the growth effect of inflation reported in the literature is an inverted-U relationship with considerations of lower bound on bank lending rates. We integrate a non-zero lower bound on the lending rate in the discussion and show the effect of inflation on optimal bank loan contracts. This paper believes that informational friction is a source of the negative relationship between inflation and growth when the loan rate constraint is non-binding. Besides, it finds out that once this loan rate constraint is binding, increasing inflation can reduce the real cost of financing capital investment and then contribute to growth. This paper also proves that the non-zero lower limit can only be reached at the low rate of inflation. It implies developing countries that are more likely to have low capital conversion efficiency and high transaction cost would hold a higher inflation-growth nexus than developed countries.

Suggested Citation

  • Fa-Hsiang Chang & Lin Zhang, 2022. "Revisiting Inflation-Growth Nexus: An Endogenous Growth Model With Financial Frictions," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 17(01), pages 1-13, March.
    • Handle: RePEc:wsi:afexxx:v:17:y:2022:i:01:n:s2010495222500014
    DOI: 10.1142/S2010495222500014
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    Cited by:

    1. Wisam Abed Shukur & Zaid M. Jawad Kubba & Saif Saad Ahmed, 2023. "Novel Standard Polynomial as New Mathematical Basis for Digital Information Encryption Process," Advances in Decision Sciences, Asia University, Taiwan, vol. 27(3), pages 72-85, September.
    2. Wang, Xiang & Yin, Jian & Yang, Yao & Muda, Iskandar & Abduvaxitovna, Shamansurova Zilola & AlWadi, Belal Mahmoud & Castillo-Picon, Jorge & Abdul-Samad, Zulkiflee, 2023. "Relationship between the resource curse, Forest management and sustainable development and the importance of R&D Projects," Resources Policy, Elsevier, vol. 85(PA).

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