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Inflation, growth and credit services

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  • Gillman, M.
  • Kejak, M.
  • Valentinyi, A.

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 empirical 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. Analysis of the welfare cost of inflation further illuminates the inflation-growth effect and how the model compares to the literature Keywords; economic growth, inflation, costly credit

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Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 9913.

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Date of creation: 01 Jan 1999
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Handle: RePEc:stn:sotoec:9913

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  1. Schreft, S L, 1992. "Transaction Costs and the Use of Cash and Credit," Economic Theory, Springer, Springer, vol. 2(2), pages 283-96, April.
  2. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," RCER Working Papers 155, University of Rochester - Center for Economic Research (RCER).
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  8. Stanley Fischer, 1991. "Growth, Macroeconomics, and Development," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1991, Volume 6, pages 329-379 National Bureau of Economic Research, Inc.
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  17. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, Elsevier, vol. 39(1), pages 5-30, July.
  18. Gillman, Max, 1993. "The welfare cost of inflation in a cash-in-advance economy with costly credit," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(1), pages 97-115, February.
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Cited by:
  1. 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.
  2. Hromcová, Jana, 2008. "Learning-or-doing in a cash-in-advance economy with costly credit," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 32(9), pages 2826-2853, September.
  3. Hromcová, Jana & Callado-Muñoz, Francisco J. & Utrero-González, Natalia, 2014. "Effects of direct pricing of retail payment methods in Norway," Economic Modelling, Elsevier, Elsevier, vol. 37(C), pages 428-438.

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