Liquidity, Innovation and Growth

Institute for Empirical Research in Economics University of Zurich Working Paper No. 441

32 Pages Posted: 25 Sep 2009 Last revised: 23 Oct 2012

See all articles by Aleksander Berentsen

Aleksander Berentsen

University of Basel - Economics Department; CESifo (Center for Economic Studies and Ifo Institute)

Mariana Rojas Breu

Banque de France, Monetary Policy Division

Shouyong Shi

Pennsylvania State University

Date Written: October 2012

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.

Keywords: Inflation, growth, search, innovation, credit

JEL Classification: E5, O42

Suggested Citation

Berentsen, Aleksander and Rojas Breu, Mariana and Shi, Shouyong, Liquidity, Innovation and Growth (October 2012). Institute for Empirical Research in Economics University of Zurich Working Paper No. 441. Available at SSRN: https://ssrn.com/abstract=1477898 or http://dx.doi.org/10.2139/ssrn.1477898

Aleksander Berentsen (Contact Author)

University of Basel - Economics Department ( email )

Petersgraben 51
Basel, CH-4003
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Mariana Rojas Breu

Banque de France, Monetary Policy Division ( email )

31 rue Croix des Petits Champs, DEMFI-POMONE
41-1422, 75049 cedex 01
Paris, 75049
France

Shouyong Shi

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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