Liquidity and Growth

Shouyong Shi, Mariana Rojas-Breu and Aleksander Berentsen

No 590, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: Many countries simultaneously suffer from high rates of inflation, low growth rates of per capita income 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 and financial development. We address two quantitative issues. One is the effects of an exogenous improvement in the productivity of the financial sector on welfare and per capita growth. The other is the effects of inflation on welfare and growth, with an emphasis on how these effects depend on a country's financial development. Consistent with the data, the growth gains of reducing the inflation rate by 10% are highly nonlinear: for a low inflation rate (10%) the gain is 0.4 percentage points while for a high rate (40%) the gain is only 0.13 percentage points. In contrast, the growth gain of an exogenous increase in financial market development is independent of the level of inflation.

Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed009:590

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