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Inflation, Growth, and Credit Services

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  • Gillman, Max

    (Department of Economics, Central European University)

  • Kejak, Michal

    (CERGE-EI)

  • Valentinyi, Akos

    (Department of Economics, University of Southampton and CEPR)

Abstract

The empirical evidence suggests that there is a significant, negative relationship between inflation and economic growth. Conventional monetary growth models, however, predict a significantly smaller growth effect. This paper proposes a monetary growth model with an explicit credit service sector to explain the observed magnitude. Since credit services are assumed costly to produce, the consumers equate the opportunity cost of holding money with the marginal cost of credit. Therefore the technology of the financial sector influences the velocity of money, and consequently, how inflation affects leisure, the time spent accumulating human capital, and the growth rate of output. The calibration shows that the model generates an inflation-growth effect whose magnitude falls in the range found by the empiri-cal studies. Moreover, in contrast to previous works, we are also able to explain an inflation-growth effect that becomes increasingly weak as the inflation rate rises, as the evidence seems to suggest.

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File URL: http://www.ihs.ac.at/publications/tec/te-13.pdf
File Function: First version, 1999
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Transition Economics Series with number 13.

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Length: 35 pages
Date of creation: Dec 1999
Date of revision:
Handle: RePEc:ihs:ihstep:13

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Keywords: Economic growth; Inflation; Costly credit;

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References

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  1. Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers 496, UCLA Department of Economics.
  2. Aiyagari, S.R. & Braum, T. & Eckstein, Z., 1995. "Transaction Services, Inflation and Welfare," Papers 27-95, Tel Aviv - the Sackler Institute of Economic Studies.
  3. Nouriel Roubini & Xavier Sala-i-Martin, 1991. "Financial Repression and Economic Growth," NBER Working Papers 3876, National Bureau of Economic Research, Inc.
  4. Gillman, Max, 1993. "The welfare cost of inflation in a cash-in-advance economy with costly credit," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 97-115, February.
  5. Stokey, Nancy L & Rebelo, Sergio, 1995. "Growth Effects of Flat-Rate Taxes," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 519-50, June.
  6. David R.F. Love & Jean-Francois Wen, 1999. "Inflation, Welfare, and the Time-Costs of Transacting," Canadian Journal of Economics, Canadian Economics Association, vol. 32(1), pages 171-194, February.
  7. Larry E. Jones & Rodolfo E. Manuelli, 1993. "Growth and the Effects of Inflation," NBER Working Papers 4523, National Bureau of Economic Research, Inc.
  8. Paul Gomme, 1991. "Money and growth revisited," Discussion Paper / Institute for Empirical Macroeconomics 55, Federal Reserve Bank of Minneapolis.
  9. Andres, Javier & Domenech, Rafael & Molinas, Cesar, 1996. "Macroeconomic performance and convergence in OECD countries," European Economic Review, Elsevier, vol. 40(9), pages 1683-1704, December.
  10. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
  11. Fischer, S., 1991. "Growth, Macroeconomics, and Development," Working papers 580, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Stanley Fischer, 1991. "Growth, Macroeconomics, and Development," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 329-379 National Bureau of Economic Research, Inc.
  13. Dotsey, Michael & Ireland, Peter, 1996. "The welfare cost of inflation in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 29-47, February.
  14. Stanley Fischer, 1991. "Growth, Macroeconomics, and Development," NBER Working Papers 3702, National Bureau of Economic Research, Inc.
  15. Friedman, Milton, 1971. "Government Revenue from Inflation," Journal of Political Economy, University of Chicago Press, vol. 79(4), pages 846-56, July-Aug..
  16. Robert J. Barro, 1996. "Inflation and growth," Review, Federal Reserve Bank of St. Louis, issue May, pages 153-169.
  17. Schreft, S L, 1992. "Transaction Costs and the Use of Cash and Credit," Economic Theory, Springer, vol. 2(2), pages 283-96, April.
  18. De Gregorio, Jose, 1993. "Inflation, taxation, and long-run growth," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 271-298, June.
  19. Bansal, Ravi & Coleman, Wilbur John, II, 1996. "A Monetary Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1135-71, December.
  20. V.V. Chari & Larry E. Jones & Rodolfo E. Manuelli, 1996. "Inflation, growth, and financial intermediation," Review, Federal Reserve Bank of St. Louis, issue May, pages 41-58.
  21. Atish Ghosh & Steven Phillips, 1998. "Warning: Inflation May Be Harmful to Your Growth," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 672-710, December.
  22. Gomme, P., 1993. "Money and Growth Revisited : Measuring the Costs of Inflation in an Endogenous Growth Model," Discussion Papers dp93-03, Department of Economics, Simon Fraser University.
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Cited by:
  1. Hromcová, Jana, 2008. "Learning-or-doing in a cash-in-advance economy with costly credit," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2826-2853, September.
  2. Dabus, C. & Viego, V., 2003. "Inflación, Precios Relativos y Crecimiento: Evidencia de América Latina," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 21, pages 91-107, Abril.
  3. Hromcová, Jana & Callado-Muñoz, Francisco J. & Utrero-González, Natalia, 2014. "Effects of direct pricing of retail payment methods in Norway," Economic Modelling, Elsevier, vol. 37(C), pages 428-438.

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