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Mitigating the Growth-Effects of Inflation through Financial Development

Author

Listed:
  • Bose Niloy

    (University of Wisconsin-Milwaukee)

  • Murshid Antu P

    (University of Wisconsin-Milwaukee)

Abstract

This paper examines the growth-effects of inflation at alternative stages of financial development. We propose an endogenous growth model where intermediated savings generate capital. Informational problems cause banks to ration credit and hold liquid assets offering (real) returns that vary inversely with inflation. Inflation therefore acts like a tax on capital accumulation. However financial development lessens credit-rationing, which reduces the demand for these liquid assets and softens the incidence of the inflation tax. Sizeable and statistically significant interactions between inflation and measures of financial development in cross-country and panel regressions provide empirical support for our model.

Suggested Citation

  • Bose Niloy & Murshid Antu P, 2008. "Mitigating the Growth-Effects of Inflation through Financial Development," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-27, February.
    • Handle: RePEc:bpj:bejmac:v:8:y:2008:i:1:n:8
    DOI: 10.2202/1935-1690.1506
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    Cited by:

    1. Slavtcheva, Dessislava, 2015. "Financial development, exchange rate regimes and productivity growth: Theory and evidence," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 109-123.
    2. Kim, Dong-Hyeon & Lin, Shu-Chin, 2023. "Income inequality, inflation and financial development," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 468-487.
    3. Huang, Ho-Chuan & Lin, Shu-Chin & Kim, Dong-Hyeon & Yeh, Chih-Chuan, 2010. "Inflation and the finance-growth nexus," Economic Modelling, Elsevier, vol. 27(1), pages 229-236, January.

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