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Inflation, growth and credit services

Inflation, growth and credit services
Inflation, growth and credit services
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
economic growth, inflation, costly credit
9913
University of Southampton
Gillman, M.
bdd177a3-33c9-42af-abe0-a22d68348374
Kejak, M.
7d5e1e50-483b-4167-b167-4f3205082b6d
Valentinyi, A.
5a4a1907-c421-4c0e-9de7-ba3da0ea6602
Gillman, M.
bdd177a3-33c9-42af-abe0-a22d68348374
Kejak, M.
7d5e1e50-483b-4167-b167-4f3205082b6d
Valentinyi, A.
5a4a1907-c421-4c0e-9de7-ba3da0ea6602

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

Record type: Monograph (Working Paper)

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

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Published date: 1999
Keywords: economic growth, inflation, costly credit

Identifiers

Local EPrints ID: 33148
URI: http://eprints.soton.ac.uk/id/eprint/33148
PURE UUID: c39e70cb-ad4b-403a-ad79-a7bbf8aed22a

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Date deposited: 10 May 2007
Last modified: 17 Jul 2017 15:53

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