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Inflation, Investment and Growth: a Money and Banking Approach

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  • MAX GILLMAN
  • MICHAL KEJAK

Abstract

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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Suggested Citation

  • Max Gillman & Michal Kejak, 2011. "Inflation, Investment and Growth: a Money and Banking Approach," Economica, London School of Economics and Political Science, vol. 78(310), pages 260-282, April.
    • Handle: RePEc:bla:econom:v:78:y:2011:i:310:p:260-282
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Chang, Wen-ya & Chen, Ying-an & Chang, Juin-jen, 2013. "Growth and welfare effects of monetary policy with endogenous fertility," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 117-130.
    2. Benk, Szilárd & Gillman, Max & Kejak, Michal, 2010. "A banking explanation of the US velocity of money: 1919-2004," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 765-779, April.
    3. Berentsen, Aleksander & Rojas Breu, Mariana & Shi, Shouyong, 2012. "Liquidity, innovation and growth," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 721-737.
    4. Eggoh, Jude C. & Khan, Muhammad, 2014. "On the nonlinear relationship between inflation and economic growth," Research in Economics, Elsevier, vol. 68(2), pages 133-143.
    5. Venky Venkateswaran & Randall Wright, 2014. "Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 227-270.
    6. Apostolos Serletis & Periklis Gogas, 2014. "Divisia Monetary Aggregates, the Great Ratios, and Classical Money Demand Functions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(1), pages 229-241, February.
    7. repec:spr:joecth:v:65:y:2018:i:4:d:10.1007_s00199-017-1040-5 is not listed on IDEAS
    8. Luintel, Kul B. & Selim, Sheikh & Bajracharya, Pushkar, 2017. "Liberalization, bankers’ motivation and productivity: A simple model with an application," Economic Modelling, Elsevier, vol. 61(C), pages 102-112.
    9. Basu, Parantap & Gillman, Max & Pearlman, Joseph, 2012. "Inflation, human capital and Tobin's q," Journal of Economic Dynamics and Control, Elsevier, vol. 36(7), pages 1057-1074.
    10. Lu Chia-Hui & Chen Been-Lon & Hsu Mei, 2011. "The Dynamic Relationship between Inflation and Output Growth in a Cash-Constrained Economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-29, May.
    11. repec:dau:papers:123456789/7354 is not listed on IDEAS
    12. Ceri Davies & Max Gillman & Michal Kejak, 2016. "Interest Rates Rules," Working Papers 1009, University of Missouri-St. Louis, Department of Economics.
    13. Maxime Menuet & Alexandru Minea & Patrick Villieu, 2018. "Deficit, monetization, and economic growth: a case for multiplicity and indeterminacy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 65(4), pages 819-853, June.

    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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