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Inflation, Financial Development and Endogenous Growth

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  • Max Gillman
  • Mark N. Harris

Abstract

The paper extends the literature on financial development, inflation, and growth by using the idea that both the rates of return on physical and human capital affect growth. This leads to the introduction of the investment rate into the model, as a proxy for the return to physical capital, along with the inflation rate as a variable affecting the return to human capital. As a result financial development plays a different role from the typical growth-enhancing effect found pervasively in the literature. Instead the results suggest a new hypothesis linking financial development to the nature of the effect of inflation on growth.

Suggested Citation

  • Max Gillman & Mark N. Harris, 2004. "Inflation, Financial Development and Endogenous Growth," Monash Econometrics and Business Statistics Working Papers 24/04, Monash University, Department of Econometrics and Business Statistics.
    • Handle: RePEc:msh:ebswps:2004-24
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    File URL: http://www.buseco.monash.edu.au/ebs/pubs/wpapers/2004/wp24-04.pdf
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    References listed on IDEAS

    as
    1. Max Gillman & Mark N. Harris & László Mátyás, 2004. "Inflation and growth: Explaining a negative effect," Empirical Economics, Springer, vol. 29(1), pages 149-167, January.
    2. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    3. S. Rao Aiyagari & R. Anton Braun & Zvi Eckstein, 1998. "Transaction Services, Inflation, and Welfare," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1274-1301, December.
    4. Max Gillman & Michal Kejak, 2005. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," Economic Journal, Royal Economic Society, vol. 115(500), pages 247-270, January.
    5. Mr. Atish R. Ghosh & Mr. Steven T Phillips, 1998. "Inflation, Disinflation, and Growth," IMF Working Papers 1998/068, International Monetary Fund.
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    7. Max Gillman & Anton Nakov, 2004. "Granger causality of the inflation–growth mirror in accession countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 12(4), pages 653-681, December.
    8. Andres, Javier & Hernando, Ignacio & Lopez-Salido, J. David, 2004. "The role of the financial system in the growth-inflation link: the OECD experience," European Journal of Political Economy, Elsevier, vol. 20(4), pages 941-961, November.
    9. Paul Wachtel & Peter L. Rousseau, 2000. "Inflation, Financial Development and Growth," Working Papers 00-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    10. Amemiya, Takeshi & MaCurdy, Thomas E, 1986. "Instrumental-Variable Estimation of an Error-Components Model," Econometrica, Econometric Society, vol. 54(4), pages 869-880, July.
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    12. Gomme, Paul, 1993. "Money and growth revisited : Measuring the costs of inflation in an endogenous growth model," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 51-77, August.
    13. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
    14. Crowder, William J, 1998. "The Long-Run Link between Money Growth and Inflation," Economic Inquiry, Western Economic Association International, vol. 36(2), pages 229-243, April.
    15. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
    16. Levine, Ross, 1992. "Financial intermediary services and growth," Journal of the Japanese and International Economies, Elsevier, vol. 6(4), pages 383-405, December.
    17. Khan, Mohsin S. & Senhadji, Abdelhak S. & Smith, Bruce D., 2006. "Inflation And Financial Depth," Macroeconomic Dynamics, Cambridge University Press, vol. 10(2), pages 165-182, April.
    18. Breusch, Trevor S & Mizon, Grayham E & Schmidt, Peter, 1989. "Efficient Estimation Using Panel Data," Econometrica, Econometric Society, vol. 57(3), pages 695-700, May.
    19. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    20. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
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    Citations

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    Cited by:

    1. Szilárd Benk & Max Gillman & Michal Kejak, 2005. "A Comparison Of Exchange Economies Within A Monetary Business Cycle," Manchester School, University of Manchester, vol. 73(4), pages 542-562, July.
    2. Guglielmo Maria Caporale & Christophe Rault & Anamaria Sova & Robert Sova, 2014. "The finance–growth nexus: evidence from ten new EU members," Chapters, in: Ewald Nowotny & Doris Ritzberger-Grünwald & Peter Backé (ed.), Financial Cycles and the Real Economy, chapter 13, pages 217-234, Edward Elgar Publishing.
    3. Jude Eggoh, 2012. "Inflation Effects on Finance-Growth Link: A Panel Smooth Threshold Approach," International Economic Journal, Taylor & Francis Journals, vol. 26(4), pages 711-725, June.
    4. Max Gillman & Mark N. Harris, 2004. "Inflation, Financial Development and Growth in Transition Countries," Monash Econometrics and Business Statistics Working Papers 23/04, Monash University, Department of Econometrics and Business Statistics.
    5. Sifundo Ntokozo Dlamini & Lindokuhle Talent Zungu & Nomusa Yolanda Nkomo, 2023. "The Optimal Level of Financial Growth in View of a Nonlinear Macroprudential Policy Regime Model: A Bayesian Approach," JRFM, MDPI, vol. 16(4), pages 1-21, April.
    6. Dombi, Akos & Grigoriadis, Theocharis, 2017. "Ancestry, Diversity & Finance: Evidence from Transition Economies," Discussion Papers 2017/4, Free University Berlin, School of Business & Economics.
    7. Gillman, Max & Harris, Mark N., 2008. "The Effect of Inflation on Growth: Evidence from a Panel of Transition Countries," Cardiff Economics Working Papers E2008/25, Cardiff University, Cardiff Business School, Economics Section.
    8. Daniel Giedeman & Ryan Compton, 2009. "A note on finance, inflation, and economic growth," Economics Bulletin, AccessEcon, vol. 29(2), pages 749-759.
    9. Max Gillman & Mark N Harris & Michal Kejak, 2007. "The Interaction of Inflation and Financial Development with Endogenous Growth," Money Macro and Finance (MMF) Research Group Conference 2006 29, Money Macro and Finance Research Group.
    10. Max Gillman & Michal Kejak, 2007. "Inflation, Financial Development and Human Capital-Based Endogenous Growth: an Explanation of Ten Empirical Findings," CDMA Conference Paper Series 0703, Centre for Dynamic Macroeconomic Analysis.
    11. Mohammad Imdadul Haque, 2020. "The Growth of Private Sector and Financial Development in Saudi Arabia," Economies, MDPI, vol. 8(2), pages 1-17, May.

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    More about this item

    Keywords

    Investment rate; return on capital; panel data; fixed effects;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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