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The Interaction of Inflation and Financial Development with Endogenous Growth

Max Gillman (), Mark Harris () and Michal Kejak ()

No 29, Money Macro and Finance (MMF) Research Group Conference 2006 from Money Macro and Finance Research Group

Abstract: A cash-in-advance, endogenous growth, economy defines financial development within a banking sector production function as the degree of scale economies for normalized capital and labor. Less financially developed economies have smaller such returns to scale, and can be credit constrained endogenously by a steeply sloping marginal cost of credit supply. The degree of scale economies uniquely determines the marginal cost curvature and the unit cost of financial intermedition, which is expressed in terms of an interest differential. The interest differential result allows for calibration of the finance production function using industry data. A hypothesis of how financial development interacts with inflation and growth is tested, using fixed effects panel estimation with endogeneity tests, dynamic panel estimation, and an extended use of multiple inflation rate splines in estimation of the growth rate

Keywords: Inflation; financial development; growth; panel data (search for similar items in EconPapers)
JEL-codes: C23 E44 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fdg and nep-mac
Date: 2007-02-02
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