Hostname: page-component-7b7567c8c-lpg2g Total loading time: 0 Render date: 2026-11-15T10:19:28.580Z Has data issue: false hasContentIssue false
  • English
  • Français

INFLATION, LIQUIDITY, AND LONG-RUN GROWTH

Published online by Cambridge University Press:  05 December 2016

Ge Zhou
Ge Zhou*
Affiliation:
College of Economics and Academy of Financial Research, Zhejiang University
*
Address correspondence to: Ge Zhou, College of Economics, Building Waijingmao, 38 Zheda Road, Hangzhou, Zhejiang, China; e-mail: flhszh@gmail.com.
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

This paper revisits the long-run relationship between inflation and economic growth by exploring the impact of inflation on investment. I illustrate that inflation may have a positive effect on growth by mitigating the liquidity risks of investment projects. Together with the traditional effect of the “inflation tax” on investment, a hump-shaped relationship between inflation and economic growth can be obtained in a calibrated model, which is consistent with the US postwar data. Sensitivity analysis suggests that the degree of financial development and the magnitude of the aggregate liquidity demand help explain the mixed empirical findings.

Keywords

Liquidity DemandCredit ConstraintInflation TaxEndogenous Growth

Information

Type
Notes
Information
Macroeconomic Dynamics , Volume 23 , Issue 2 , March 2019, pp. 888 - 906
Copyright
Copyright © Cambridge University Press 2016 

Footnotes

I would like to thank Lawrence Christiano, Danyang Xie, Jenny Xu, Pengfei Wang, an anonymous referee, the editors, and seminar participants at UNNC, PHBS, and AFR Summer Institute for helpful comments. I also thank Yuting Yang for excellent research assistance. All remaining errors are mine.

References

REFERENCES

Ahmed, S. and Rogers, J. H. (2000) Inflation and the great ratios: Long term evidence from the U.S. Journal of Monetary Economics 45, 3–35.10.1016/S0304-3932(99)00040-9Google Scholar
Bullar, J. and Keating, J. W. (1995) The long-run relationship between inflation and output in postwar economies. Journal of Monetary Economics 36, 477–496.10.1016/0304-3932(95)01227-3Google Scholar
Chu, A. C. and Lai, C. C. (2013) Money and the welfare cost of inflation in an R&D growth model. Journal of Money, Credit and Banking 45, 233–249.10.1111/j.1538-4616.2012.00568.xGoogle Scholar
Diamond, D. W. and Rajan, R. G. (2006) Money in a theory of banking. American Economic Review 96, 30–53.10.1257/000282806776157759Google Scholar
Ghosh, A. and Phillips, S. (1998) Inflation, Disinflation, and Growth. IMF working paper WP/98/68.10.5089/9781451961188.001Google Scholar
Ghossoub, E. and Reed, R. R. III (2010) Liquidity risk, economic development, and the effects of monetary policy. European Economic Review 54, 252–268.10.1016/j.euroecorev.2009.06.003Google Scholar
Gillman, M. and Kejak, M. (2005a) Inflation and balanced-path growth with alternative payment mechanisms. Economic Journal 115, 247–270.10.1111/j.1468-0297.2004.00968.xGoogle Scholar
Gillman, M. and Kejak, M. (2005b) Contrasting models of the effect of inflation on growth. Journal of Economic Surveys 19, 113–136.10.1111/j.0950-0804.2005.00241.xGoogle Scholar
Gomme, P. (1993) Money and growth revisited: Measuring the costs of inflation in an endogenous growth model. Journal of Monetary Economics 32, 51–77.10.1016/0304-3932(93)90035-EGoogle Scholar
Holmstrom, B. and Tirole, J. (1998) Private and public supply of liquidity. Journal of Political Economy 106, 1–40.10.1086/250001Google Scholar
Khan, M. S. and Senhadji, A. S. (2001) Threshold effects in the relationship between inflation and growth. IMF Staff Papers 48, 1–21.Google Scholar
Kremer, S., Bick, A. and Nautz, D. (2013) Inflation and growth: New evidence from a dynamic panel threshold analysis. Empirical Economics 44, 861–878.10.1007/s00181-012-0553-9Google Scholar
Levine, R. (1997) Financial development and economic growth: Views and agenda. Journal of Economic Literature 35, 688–726.Google Scholar
Levine, R. (2005) Finance and growth: Theory and evidence. In Aghion, Philippe and Durlauf, Steven N. (eds.), Handbook of Economic Growth, pp. 865–934. Elsevier B.V.Google Scholar
Miao, J. and Xie, D. (2013) Economic growth under money illusion. Journal of Economic Dynamics and Control 37, 84–103.10.1016/j.jedc.2012.06.012Google Scholar
Sarel, M. (1996) Nonlinear effects of inflation on economic growth. IMF Staff Papers 43, 199–215.10.2307/3867357Google Scholar
Stockman, A. C. (1981) Anticipated inflation and the capital stock in a cash-in-advance economy. Journal of Monetary Economics 8, 387–393.10.1016/0304-3932(81)90018-0Google Scholar
Wang, P. and Xie, D. (2013) Real effects of money growth and optimal rate of inflation in a cash-in-advance economy with labor-market frictions. Journal of Money, Credit and Banking 45, 1517–1546.10.1111/jmcb.12061Google Scholar