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Liquidity, Innovation and Growth

  • Aleksander Berentsen
  • Mariana Rojas Breu
  • Shouyong Shi

Many countries simultaneously suffer from high inflation, low growth and poorly developed financial sectors. In this paper, we integrate a microfounded model of money and finance into a model of endogenous growth to examine the effects of inflation on welfare, growth and the size of the financial sector. A novel feature is that the innovation sector is decentralized. Financial intermediaries arise endogenously to provide liquidity to this sector. Consistent with the data but in contrast to previous work, reducing inflation generates large growth gains. These large gains cannot be easily reproduced by imposing a cash-in-advance constraint in the innovation sector.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-467.

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Date of creation: 04 Nov 2012
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Handle: RePEc:tor:tecipa:tecipa-467
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