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Liquidity, Innovation and Growth

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  • Aleksander Berentsen
  • Mariana Rojas Breu
  • Shouyong Shi

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. A novel feature of the model is that the market for innovation goods is decentralized. Financial intermediaries arise endogenously to provide liquid funds to the innovation sector. We calibrate the model to 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. Consistent with the data but in contrast to previous work, reducing inflation generates large gains in the growth rate of per capita income as well as in welfare. Relative to reducing inflation, improving the efficiency of the financial market increases growth and welfare by much smaller amounts.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-371.

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Length: 45 pages
Date of creation: 24 Sep 2009
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Handle: RePEc:tor:tecipa:tecipa-371

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Keywords: Money; Growth; Innovation; Financial intermediation;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Liquidity, Innovation and Growth
    by Christian Zimmermann in NEP-DGE blog on 2009-10-11 03:08:02
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi, 2013. "A Schumpeterian Analysis of Monetary Policy, Innovation and North-South Technology Transfer," MPRA Paper 49533, University Library of Munich, Germany.
  2. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi, 2013. "Inflation, Unemployment and Economic Growth in a Schumpeterian Economy," Economics Working Paper Series 1323, University of St. Gallen, School of Economics and Political Science.
  3. Jonathan Chiu & Cesaire Meh & Randall Wright, 2011. "Innovation and growth with financial, and other, frictions," Working Papers, Federal Reserve Bank of Minneapolis 688, Federal Reserve Bank of Minneapolis.
  4. Angus C. Chu & Guido Cozzi, 2014. "R&D And Economic Growth In A Cash‐In‐Advance Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 507-524, 05.
  5. Chu, Angus C. & Cozzi, Guido & Lai, Ching-Chong & Liao, Chih-Hsing, 2013. "Monetary Policy, R&D and Economic Growth in an Open Economy," Economics Working Paper Series 1315, University of St. Gallen, School of Economics and Political Science.

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