EconPapers    
Economics at your fingertips  
 

Inflation, Liquidity Risk and Long-run TFP - Growth

Michael Evers (), Stefan Niemann and Marc Schiffbauer
Additional contact information
Marc Schiffbauer: ESRI

No DYNREG48, Papers from Economic and Social Research Institute (ESRI)

Abstract: This paper demonstrates a negative relation between inflation and long-run productivity growth. Inflation generates long-run real effects due to a link from the short-run nominal and financial frictions to a firm's qualitative investment portfolio. We develop an endogenous growth model whose key ingredients are (i) a nominal short-run portfolio choice for households, (ii) an agency problem which gives rise to financial market incompleteness, (iii) a firm-level technology choice between a return-dominated but secure and a more productive but risky project. In this framework, inflation increases the costs of corporate insurance against productive but risky projects and hence a firm's choice of technology. It follows that each level of inflation is associated with a different long-run balanced growth path for the economy as long as financial markets are incomplete. Finally, we apply U.S. industry and firm level data to examine the relevance of our specific microeconomic mechanism. We find that (i) firms insure systematically against risky R&D investments by means of corporate liquidity holdings, (ii) periods of higher inflation restrain firm-level R&D investments by reducing corporate liquidity holdings.

Pages: 40 pages
Date: 2009
New Economics Papers: this item is included in nep-bec, nep-dge, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:esr:wpaper:dynreg48

Access Statistics for this paper

More papers in Papers from Economic and Social Research Institute (ESRI) Contact information at EDIRC.
Bibliographic data for series maintained by Sarah Burns ().

 
Page updated 2023-02-02
Handle: RePEc:esr:wpaper:dynreg48