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Inflation, Financial Markets and Long-Run Real Activity

Author

Listed:
  • Elisabeth Huybens

    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

  • Bruce D. Smith

    (University of Texas)

Abstract

Empirical evidence suggest that real activity, the volume of bank lending activity, and the volume of trading in equity markets are strongly positively correlated. At the same time. inflation and the volume of financial market activity are strongly negatively correlated (in the long-run), as are inflation and the real rate of return on equity. Inflation anr real activity are also negatively correlated in the long-run, particularly for economies with relatively high rates of inflation. We present a monetary growth model in which banks and secundary capital markets play a crucial allocative function. We show that - at least under certain configurations of parameters - the predictions of the model are consistent with these and several other observations about finance, inflation and long-run real activity.

Suggested Citation

  • Elisabeth Huybens & Bruce D. Smith, 1997. "Inflation, Financial Markets and Long-Run Real Activity," Working Papers 9707, Centro de Investigacion Economica, ITAM.
    • Handle: RePEc:cie:wpaper:9707
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