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Inflation, Growth, and Credit Services

Listed author(s):
  • Max Gillman

    (CEU Budapest)

  • Michal Kejak

    (CERGE-EI)

  • Akos Valentinyi

    (University of Southampton & CEPR)

The empirical evidence suggests that there is a significant, negative relationship between inflation and economic growth. Conventional monetary growth models, however, predict a significantly smaller growth effect. This paper proposes a monetary growth model with an explicit credit service sector to explain the observed magnitude. Since credit services are assumed costly to produce, the consumers equate the opportunity cost of holding money with the marginal cost of credit. Therefore the technology of the financial sector influences the velocity of money, and consequently, how inflation affects leisure, the time spent accumulating human capital, and the growth rate of output. The calibration shows that the model generates an inflation-growth effect whose magnitude falls in the range found by the empirical studies. Moreover, in contrast to previous works, we are also able to explain an inflation-growth effect that becomes increasingly weak as the inflation rate rises, as the evidence seems to suggest. Analysis of the welfare cost of inflation further illuminates the inflation-growth effect and how the model compares to the literature.

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File URL: http://econwpa.repec.org/eps/dev/papers/0012/0012007.pdf
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Paper provided by EconWPA in its series Development and Comp Systems with number 0012007.

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Length: 35 pages
Date of creation: 16 Feb 2001
Handle: RePEc:wpa:wuwpdc:0012007
Note: Type of Document - Acrobat PDF; pages: 35 ; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

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