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Inflation, Investment and Growth: a Banking Approach

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  • Gillman, Max

    ()
    (Cardiff Business School)

  • Kejak, Michal

Abstract

Output growth, investment and the real interest rate are all found empirically to be negatively affected by inflation. But a seeming puzzle arises of opposite Tobin-like inflation effects because theory indicates a negative Tobin effect when investment falls and a positive Tobin effect when the real interest rate rises. We define inflation's Tobin effect more specifically in terms of the effect on the capital to effective labor ratio and resolve the puzzle by showing the simultaneous occurrence of all three negative inflation effects, on growth, investment and real interest rates, in a model calibrated to postwar US data. Here, investment along with consumption are exchanged for within a monetary endogenous growth economy with human capital and a decentralized credit-producing sector.

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Bibliographic Info

Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2008/18.

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Length: 35 pages
Date of creation: Aug 2008
Date of revision: Oct 2008
Publication status: Published in Economica, 78 (310, April 2011): 260-282 .
Handle: RePEc:cdf:wpaper:2008/18

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Keywords: Inflation; investment; growth; Tobin;

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References

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  1. Byrne, Joseph P. & Davis, E. Philip, 2004. "Permanent and temporary inflation uncertainty and investment in the United States," Economics Letters, Elsevier, Elsevier, vol. 85(2), pages 271-277, November.
  2. Szilárd Benk & Max Gillman & Michal Kejak, 2007. "Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks," MNB Working Papers, Magyar Nemzeti Bank (the central bank of Hungary) 2007/5, Magyar Nemzeti Bank (the central bank of Hungary).
  3. Sealey, Calvin W, Jr & Lindley, James T, 1977. "Inputs, Outputs, and a Theory of Production and Cost at Depository Financial Institutions," Journal of Finance, American Finance Association, American Finance Association, vol. 32(4), pages 1251-66, September.
  4. R. Anton Braun & Max Gillman, 2006. "Banking in General Equilibrium with an Application to Japan," CIRJE F-Series, CIRJE, Faculty of Economics, University of Tokyo CIRJE-F-412, CIRJE, Faculty of Economics, University of Tokyo.
  5. Rapach, David E & Wohar, Mark E, 2005. "Regime Changes in International Real Interest Rates: Are They a Monetary Phenomenon?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 37(5), pages 887-906, October.
  6. Smith, R. Todd & van Egteren, Henry, 2005. "Inflation, investment and economic performance: The role of internal financing," European Economic Review, Elsevier, Elsevier, vol. 49(5), pages 1283-1303, July.
  7. Hancock, Diana, 1985. "The Financial Firm: Production with Monetary and Nonmonetary Goods," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(5), pages 859-80, October.
  8. Mansoorian, Arman & Mohsin, Mohammed, 2006. "On the employment, investment and current account effects of inflation," Journal of International Economics, Elsevier, Elsevier, vol. 70(1), pages 296-313, September.
  9. Max Gillman & Michal Kejak, 2004. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," IEHAS Discussion Papers, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences 0402, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  10. Max Gillman & Mark N. Harris & László Mátyás, 2004. "Inflation and growth: Explaining a negative effect," Empirical Economics, Springer, Springer, vol. 29(1), pages 149-167, January.
  11. Clark, Jeffrey A, 1984. "Estimation of Economies of Scale in Banking Using a Generalized Functional Form," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 16(1), pages 53-68, February.
  12. Nelson C. Mark & Donggyu Sul, 2002. "Cointegration Vector Estimation by Panel DOLS and Long-Run Money Demand," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0287, National Bureau of Economic Research, Inc.
  13. Gillman, Max & Otto, Glen, 2006. "Money Demand in General Equilibrium Endogenous Growth: Estimating the Role of a Variable Interest Elasticity," Cardiff Economics Working Papers E2006/24, Cardiff University, Cardiff Business School, Economics Section, revised Oct 2006.
  14. Jakob B. Madsen, 2003. "Inflation and Investment," Scottish Journal of Political Economy, Scottish Economic Society, Scottish Economic Society, vol. 50(4), pages 375-397, 09.
  15. Max Gillman & Anton Nakov, 2003. "A Revised Tobin Effect from Inflation: Relative Input Price and Capital Ratio Realignments, USA and UK, 1959-1999," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 70(279), pages 439-450, 08.
  16. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 8(3), pages 387-393.
  17. Max Gillman & Michal Kejak, 2005. "Contrasting Models of the Effect of Inflation on Growth," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 19(1), pages 113-136, 02.
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Citations

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Cited by:
  1. Ceri Davies & Max Gillman & Michal Kejak, 2012. "Deriving the Taylor Principle when the Central Bank Supplies Money," CEU Working Papers, Department of Economics, Central European University 2012_13, Department of Economics, Central European University, revised 23 Jul 2012.
  2. Scheffel, Eric, 2008. "A Credit-Banking Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Cardiff Economics Working Papers E2008/30, Cardiff University, Cardiff Business School, Economics Section.
  3. Scheffel, Eric, 2008. "Consumption Velocity in a Cash Costly-Credit Model," Cardiff Economics Working Papers E2008/31, Cardiff University, Cardiff Business School, Economics Section.

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