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Liquidity and Growth

Author

Listed:
  • Shouyong Shi

    (University of Toronto)

  • Mariana Rojas Breu

    (University of Basel)

  • Aleksander Berentsen

    (University of Basel)

Abstract
Many countries simultaneously suffer from high rates of inflation, low growth rates of per capita income 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 and financial development. We address two quantitative issues. One is the effects of an exogenous improvement in the productivity of the financial sector on welfare and per capita growth. The other is the effects of inflation on welfare and growth, with an emphasis on how these effects depend on a country's financial development. Consistent with the data, the growth gains of reducing the inflation rate by 10% are highly nonlinear: for a low inflation rate (10%) the gain is 0.4 percentage points while for a high rate (40%) the gain is only 0.13 percentage points. In contrast, the growth gain of an exogenous increase in financial market development is independent of the level of inflation.

Suggested Citation

  • Shouyong Shi & Mariana Rojas Breu & Aleksander Berentsen, 2009. "Liquidity and Growth," 2009 Meeting Papers 590, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:590
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    References listed on IDEAS

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    Cited by:

    1. Aleksander Berentsen, 1998. "Monetary Policy Implications of Digital Money," Kyklos, Wiley Blackwell, vol. 51(1), pages 89-118, February.
    2. 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.
    3. Waller, Christopher J., 2011. "Random Matching And Money In The Neoclassical Growth Model: Some Analytical Results," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S2), pages 293-312, September.
    4. Silveira, Rafael & Wright, Randall, 2010. "Search and the market for ideas," Journal of Economic Theory, Elsevier, vol. 145(4), pages 1550-1573, July.

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