Inflation, growth and credit services


Gillman, M., Kejak, M. and Valentinyi, A. (1999) Inflation, growth and credit services. Southampton, UK, University of Southampton, 43pp. (Discussion Papers in Economics and Econometrics 9913).

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Description/Abstract

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

Item Type: Monograph (Working Paper)
Related URLs:
Keywords: economic growth, inflation, costly credit
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
H Social Sciences > HJ Public Finance
Divisions: University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 33148
Date Deposited: 10 May 2007
Last Modified: 27 Mar 2014 18:20
Publisher: University of Southampton
URI: http://eprints.soton.ac.uk/id/eprint/33148

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