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Liquidity, innovation and growth

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  • Berentsen, Aleksander
  • Rojas Breu, Mariana
  • Shi, Shouyong

Abstract

Many countries simultaneously suffer from high inflation, low growth 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 on welfare, growth and the size of the financial sector. A novel feature is that the innovation sector is decentralized. Financial intermediaries arise endogenously to provide liquidity to this sector. Consistent with the data but in contrast to previous work, reducing inflation generates large growth gains. These large gains cannot be easily reproduced by imposing a cash-in-advance constraint in the innovation sector.

Suggested Citation

  • Berentsen, Aleksander & Rojas Breu, Mariana & Shi, Shouyong, 2012. "Liquidity, innovation and growth," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 721-737.
    • Handle: RePEc:eee:moneco:v:59:y:2012:i:8:p:721-737
    DOI: 10.1016/j.jmoneco.2012.10.005
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    1. Liquidity, Innovation and Growth
      by Christian Zimmermann in NEP-DGE blog on 2009-10-11 08:08:02

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    4. Silveira, Rafael & Wright, Randall, 2010. "Search and the market for ideas," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1550-1573, July.
    5. Jonathan Chiu & Cesaire Meh & Randall Wright, 2017. "Innovation And Growth With Financial, And Other, Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(1), pages 95-125, February.
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    13. Chu, Angus C. & Liao, Chih-Hsing & Liu, Xiangbo & Zhang, Mengbo, 2021. "Indeterminacy in a matching model of money with productive government expenditure," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 497-516.
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    15. Jonathan Chiu & Cesaire Meh & Randall Wright, 2017. "Innovation And Growth With Financial, And Other, Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58, pages 95-125, February.
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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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