IDEAS home Printed from https://ideas.repec.org/p/cdf/wpaper/2008-18.html
   My bibliography  Save this paper

Inflation, Investment and Growth: a Banking Approach

Author

Listed:

Abstract

Output growth, investment and the real interest rate are all found empirically to be negatively affected by inflation. But a seeming puzzle arises of opposite Tobin-like inflation effects because theory indicates a negative Tobin effect when investment falls and a positive Tobin effect when the real interest rate rises. We define inflation's Tobin effect more specifically in terms of the effect on the capital to effective labor ratio and resolve the puzzle by showing the simultaneous occurrence of all three negative inflation effects, on growth, investment and real interest rates, in a model calibrated to postwar US data. Here, investment along with consumption are exchanged for within a monetary endogenous growth economy with human capital and a decentralized credit-producing sector.

Suggested Citation

  • Gillman, Max & Kejak, Michal, 2008. "Inflation, Investment and Growth: a Banking Approach," Cardiff Economics Working Papers E2008/18, Cardiff University, Cardiff Business School, Economics Section, revised Oct 2008.
  • Handle: RePEc:cdf:wpaper:2008/18
    as

    Download full text from publisher

    File URL: http://carbsecon.com/wp/E2008_18.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
    2. Max Gillman & Michal Kejak, 2005. "Contrasting Models of the Effect of Inflation on Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 19(1), pages 113-136, February.
    3. R. Anton Braun & Max Gillman, 2006. "Banking in General Equilibrium with an Application to Japan," CIRJE F-Series CIRJE-F-412, CIRJE, Faculty of Economics, University of Tokyo.
    4. Max Gillman & Anton Nakov, 2003. "A Revised Tobin Effect from Inflation: Relative Input Price and Capital Ratio Realignments, USA and UK, 1959-1999," Economica, London School of Economics and Political Science, vol. 70(279), pages 439-450, August.
    5. Max Gillman & Mark N. Harris & László Mátyás, 2004. "Inflation and growth: Explaining a negative effect," Empirical Economics, Springer, vol. 29(1), pages 149-167, January.
    6. Byrne, Joseph P. & Davis, E. Philip, 2004. "Permanent and temporary inflation uncertainty and investment in the United States," Economics Letters, Elsevier, vol. 85(2), pages 271-277, November.
    7. Max Gillman & Michal Kejak, 2005. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," Economic Journal, Royal Economic Society, vol. 115(500), pages 247-270, January.
    8. Szilárd Benk & Max Gillman & Michal Kejak, 2008. "Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1281-1293, September.
    9. Gillman, Max & Otto, Glen, 2006. "Money Demand in General Equilibrium Endogenous Growth: Estimating the Role of a Variable Interest Elasticity," Cardiff Economics Working Papers E2006/24, Cardiff University, Cardiff Business School, Economics Section, revised Oct 2006.
    10. Nelson C. Mark & Donggyu Sul, 2003. "Cointegration Vector Estimation by Panel DOLS and Long-run Money Demand," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(5), pages 655-680, December.
    11. Jakob B. Madsen, 2003. "Inflation and Investment," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(4), pages 375-397, September.
    12. Clark, Jeffrey A, 1984. "Estimation of Economies of Scale in Banking Using a Generalized Functional Form," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 53-68, February.
    13. Hancock, Diana, 1985. "The Financial Firm: Production with Monetary and Nonmonetary Goods," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 859-880, October.
    14. Smith, R. Todd & van Egteren, Henry, 2005. "Inflation, investment and economic performance: The role of internal financing," European Economic Review, Elsevier, vol. 49(5), pages 1283-1303, July.
    15. Sealey, Calvin W, Jr & Lindley, James T, 1977. "Inputs, Outputs, and a Theory of Production and Cost at Depository Financial Institutions," Journal of Finance, American Finance Association, vol. 32(4), pages 1251-1266, September.
    16. Rapach, David E & Wohar, Mark E, 2005. "Regime Changes in International Real Interest Rates: Are They a Monetary Phenomenon?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 887-906, October.
    17. Mansoorian, Arman & Mohsin, Mohammed, 2006. "On the employment, investment and current account effects of inflation," Journal of International Economics, Elsevier, vol. 70(1), pages 296-313, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ceri Davies & Max Gillman & Michal Kejak, 2012. "Deriving the Taylor Principle when the Central Bank Supplies Money," CEU Working Papers 2012_13, Department of Economics, Central European University, revised 23 Jul 2012.
    2. Scheffel, Eric, 2008. "A Credit-Banking Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Cardiff Economics Working Papers E2008/30, Cardiff University, Cardiff Business School, Economics Section.
    3. Scheffel, Eric, 2008. "Consumption Velocity in a Cash Costly-Credit Model," Cardiff Economics Working Papers E2008/31, Cardiff University, Cardiff Business School, Economics Section.

    More about this item

    Keywords

    Inflation; investment; growth; Tobin;

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cdf:wpaper:2008/18. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Yongdeng Xu). General contact details of provider: http://edirc.repec.org/data/ecscfuk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.