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Inflation, Financial Development and Human Capital-Based Endogenous Growth: an Explanation of Ten Empirical Findings

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  • Max Gillman

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  • Michal Kejak
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    Abstract

    The paper presents a general equilibrium that can explain ten related sets of empirical results, providing a unified approach to understand usually disparate effects typically treated separately. These are grouped into two sets, one on financial development, investment and inflation, and one on inflations effect on other economy-wide variables such as growth, real interest rates, employment, and money demand. The unified approach also contributes a systematic explanation of certain nonlinearities that are found across these results, as based on the production function for financial intermediary services and the resultant money demand function.

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    File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/cp0703.pdf
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    Bibliographic Info

    Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0703.

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    Date of creation: Nov 2007
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    Handle: RePEc:san:cdmacp:0703

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    Postal: Department of Economics, University of St. Andrews, Fife KY16 9AL
    Phone: 01334 462420
    Fax: 01334 462444
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    Web page: http://www.st-andrews.ac.uk/cdma
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    Keywords: Inflation; financial development; growth; exchange credit production;

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    1. Shaghil Ahmed & John H. Rogers, 1998. "Inflation and the great ratios: long-term evidence from the U.S," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 628, Board of Governors of the Federal Reserve System (U.S.).
    2. Szilárd Benk & Max Gillman & Michal Kejak, 2008. "Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 40(6), pages 1281-1293, 09.
    3. Howitt, Peter & Mayer-Foulkes, David & Aghion, Philippe, 2005. "The Effect of Financial Development on Convergence: Theory and Evidence," Scholarly Articles 4481509, Harvard University Department of Economics.
    4. Max Gillman & Mark N. Harris, 2004. "Inflation, Financial Development and Endogenous Growth," Monash Econometrics and Business Statistics Working Papers, Monash University, Department of Econometrics and Business Statistics 24/04, Monash University, Department of Econometrics and Business Statistics.
    5. Baltensperger, Ernst, 1980. "Alternative approaches to the theory of the banking firm," Journal of Monetary Economics, Elsevier, Elsevier, vol. 6(1), pages 1-37, January.
    6. Ireland, Peter N., 1999. "Does the time-consistency problem explain the behavior of inflation in the United States?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(2), pages 279-291, October.
    7. Max Gillman & Michal Kejak, 2005. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(500), pages 247-270, 01.
    8. 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.
    9. Jonathan B. Berk & Richard C. Green, 2002. "Mutual Fund Flows and Performance in Rational Markets," FAME Research Paper Series, International Center for Financial Asset Management and Engineering rp100, International Center for Financial Asset Management and Engineering.
    10. Max Gillman & Mark N. Harris, 2004. "Inflation, Financial Development and Growth in Transition Countries," Monash Econometrics and Business Statistics Working Papers, Monash University, Department of Econometrics and Business Statistics 23/04, Monash University, Department of Econometrics and Business Statistics.
    11. Li, Victor E, 2000. "Household Credit and the Monetary Transmission Mechanism," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 32(3), pages 335-56, August.
    12. Alex Trew, 2006. "Finance and Growth: A Critical Survey," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 82(259), pages 481-490, December.
    13. Canzoneri, Matthew B. & Diba, Behzad T., 2005. "Interest rate rules and price determinacy: The role of transactions services of bonds," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(2), pages 329-343, March.
    14. Jakob B. Madsen, 2003. "Inflation and Investment," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(4), pages 375-397, 09.
    15. 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.
    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. Rapach, David E, 2003. " International Evidence on the Long-Run Impact of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(1), pages 23-48, February.
    18. Nelson C. Mark & Donggyu Sul, 2002. "Cointegration Vector Estimation by Panel DOLS and Long-Run Money Demand," NBER Technical Working Papers 0287, National Bureau of Economic Research, Inc.
    19. 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.
    20. 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.
    21. John Driffill, 2003. "Growth and Finance," Manchester School, University of Manchester, vol. 71(4), pages 363-380, 07.
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