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Liquidity and Growth

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  • Shouyong Shi

    (University of Toronto)

  • Mariana Rojas Breu

    (University of Basel)

  • Aleksander Berentsen

    (University of Basel)

Abstract

Many countries simultaneously suffer from high rates of inflation, low growth rates of per capita income and poorly developed financial sectors. In this paper, we integrate a microfounded model of money and finance into a model of endogenous growth to examine the effects of inflation and financial development. We address two quantitative issues. One is the effects of an exogenous improvement in the productivity of the financial sector on welfare and per capita growth. The other is the effects of inflation on welfare and growth, with an emphasis on how these effects depend on a country's financial development. Consistent with the data, the growth gains of reducing the inflation rate by 10% are highly nonlinear: for a low inflation rate (10%) the gain is 0.4 percentage points while for a high rate (40%) the gain is only 0.13 percentage points. In contrast, the growth gain of an exogenous increase in financial market development is independent of the level of inflation.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 590.

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Date of creation: 2009
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Handle: RePEc:red:sed009:590

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  1. S. Rao Aiyagari & R. Anton Braun & Zvi Eckstein, 1998. "Transaction services, inflation, and welfare," Staff Report 241, Federal Reserve Bank of Minneapolis.
  2. Dirk Krueger & Fabrizio Perri, 2005. "Does income inequality lead to consumption equality? evidence and theory," Staff Report 363, Federal Reserve Bank of Minneapolis.
  3. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
  4. Levine, Ross & Loayza, Norman & Beck, Thorsten, 1999. "Financial intermediation and growth : Causality and causes," Policy Research Working Paper Series 2059, The World Bank.
  5. Bruce D. Smith & John H. Boyd, 1998. "Capital market imperfections in a monetary growth model," Economic Theory, Springer, vol. 11(2), pages 241-273.
  6. Max Gillman & Michal Kejak, 2005. "Contrasting Models of the Effect of Inflation on Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 19(1), pages 113-136, 02.
  7. Joseph H. Haslag, 1995. "Monetary policy, banking, and growth," Working Papers 9515, Federal Reserve Bank of Dallas.
  8. Gylfason, Thorvaldur & Herbertsson, Tryggvi Thor, 1996. "Does Inflation Matter for Growth?," CEPR Discussion Papers 1503, C.E.P.R. Discussion Papers.
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Cited by:
  1. Nadia F. Piffaretti, 1998. "A Theoretical Approach to Electronic Money," FSES Working Papers 302, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
  2. Berentsen, Aleksander, 1997. "Monetary policy implications of digital money," MPRA Paper 37392, University Library of Munich, Germany.

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