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Inflation and Endogenous Technological Growth

Author

Listed:
  • Gil Mehrez

    (Georgetown University)

  • Michael Frenkel

    (WHU Koblenz, Otto Beisheim Graduate School of Management)

Abstract

The paper develops a Romer-type growth model with a research sector, a manufacturing sector, and a financial sector and shows that inflation has an adverse effect on economic growth. Higher inflation increases the incentives for agents to use money substitutes through financial services in an attempt to reduce inflation tax. This increases the size of the financial sector and shifts resources out of other sectors of the economy including research, the engine of growth, into the financial sector. As a consequence, the economy-wide growth rate declines. The paper examines the empirical evidence using panel data of 17 countries which have experienced medium or high inflation. The results strongly support the hypothesis of the expansionary effect of inflation on the size of the financial sector and the negative effect of inflation on growth.

Suggested Citation

  • Gil Mehrez & Michael Frenkel, 1998. "Inflation and Endogenous Technological Growth," Macroeconomics 9808001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:9808001
    Note: Type of Document - WordPerfect; prepared on IBM PC; to print on HP; pages: 26 ; figures: included
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    Citations

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    Cited by:

    1. Kiliç, Cuneyt & Arica, Feyza, 2014. "Economic Freedom, Inflation Rate and their Impact on Economic Growth: A Panel Data Analysis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 160-176, March.
    2. Ghulam Muhammad Mangnejo & Muhammad Saleem Rahpoto, 2019. "A Study of Linkages between Fiscal Decentralization and Macroeconomic Performance in Pakistan (2000-2015)," Global Regional Review, Humanity Only, vol. 4(4), pages 219-228, December.

    More about this item

    Keywords

    Inflation; Growth; Resource Allocation;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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