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Inflation, Investment and Growth: a Money and Banking Approach

Listed author(s):
  • MAX GILLMAN
  • MICHAL KEJAK

Output growth, investment and the real interest rate in long run evidence tend to be negatively affected by inflation. Theoretically, inflation acts as a human capital tax that decreases output growth and the real interest rate, but increases the investment rate, opposite of evidence. The paper resolves this puzzle by requiring exchange for investment as well as consumption. Inflation then decreases the investment rate, and still decreases both output growth and real interest up to some moderately high rate of inflation, above which increasingly low investment finally causes capital to fall relative to labor, and the real interest rate to rise.

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Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 78 (2011)
Issue (Month): 310 (04)
Pages: 260-282

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Handle: RePEc:bla:econom:v:78:y:2011:i:310:p:260-282
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