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Inflation, Investment and Growth: a Money and Banking Approach

  • Max Gillman

    ()

    (Cardiff Business School Cardiff University, Research Associate, Institute of Economics Hungarian Academy of Sciences)

  • Michal Kejak

    ()

    (The Center for Economic Research and Graduate Education of Charles University (CERGE EI))

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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Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0911.

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Length: 40 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:has:discpr:0911
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