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The Interaction of Inflation and Financial Development with Endogenous Growth

  • Max Gillman

    (Cardiff Business School)

  • Mark N Harris

    (Monash University)

  • Michal Kejak

    (CERGE-EI Prague)

A cash-in-advance, endogenous growth, economy defines financial development within a banking sector production function as the degree of scale economies for normalized capital and labor. Less financially developed economies have smaller such returns to scale, and can be credit constrained endogenously by a steeply sloping marginal cost of credit supply. The degree of scale economies uniquely determines the marginal cost curvature and the unit cost of financial intermedition, which is expressed in terms of an interest differential. The interest differential result allows for calibration of the finance production function using industry data. A hypothesis of how financial development interacts with inflation and growth is tested, using fixed effects panel estimation with endogeneity tests, dynamic panel estimation, and an extended use of multiple inflation rate splines in estimation of the growth rate

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File URL: http://repec.org/mmf2006/up.10040.1143126358.pdf
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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 29.

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Date of creation: 02 Feb 2007
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Handle: RePEc:mmf:mmfc06:29
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