Inflation, Growth, and Credit Services
AbstractThe 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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Bibliographic InfoPaper provided by Institute for Advanced Studies in its series Transition Economics Series with number 13.
Length: 35 pages
Date of creation: Dec 1999
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Other versions of this item:
- Max Gillman & Michal Kejak & Akos Valentinyi, 2001. "Inflation, Growth, and Credit Services," Development and Comp Systems 0012007, EconWPA.
- Max Gillman & Michal Kejak & Akos Valentinyi, 2000. "Inflation, Growth, and Credit Services," CERGE-EI Working Papers wp154, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
- Gillman, M. & Kejak, M. & Valentinyi, A., 1999. "Inflation, growth and credit services," Discussion Paper Series In Economics And Econometrics 9913, Economics Division, School of Social Sciences, University of Southampton.
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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