Inflation, Growth, and Credit Services

CERGE-EI Working Paper No. 154

36 Pages Posted: 5 Feb 2001

See all articles by Max Gillman

Max Gillman

Central European University (CEU) - Department of Economics

Michal Kejak

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Akos Valentinyi

University of Manchester; CERS-HAS; CEPR

Multiple version iconThere are 2 versions of this paper

Date Written: April 2000

Abstract

The empirical evidence suggests that there is a significant, negative relationship between inflation and economic growth. Conventional monetary growth models, however, predict a significantly smaller growth effect. This paper proposes a monetary growth model with an explicit credit service sector to explain the observed magnitude. Since credit services are assumed costly to produce, the consumers equate the opportunity cost of holding money with the marginal cost of credit. Therefore the technology of the financial sector influences the velocity of money, and consequently, how inflation affects leisure, the time spent accumulating human capital, and the growth rate of output. The calibration shows that the model generates an inflation-growth effect whose magnitude falls in the range found by the empirical studies. Moreover, in contrast to previous works, we are also able to explain an inflation-growth effect that becomes increasingly weak as the inflation rate rises, as the evidence seems to suggest. Analysis of the welfare cost of inflation further illuminates the inflation-growth effect and how the model compares to the literature.

Keywords: Economic Growth, Inflation, Costly Credit

JEL Classification: O11, E31

Suggested Citation

Gillman, Max and Kejak, Michal and Valentinyi, Akos, Inflation, Growth, and Credit Services (April 2000). CERGE-EI Working Paper No. 154, Available at SSRN: https://ssrn.com/abstract=239388 or http://dx.doi.org/10.2139/ssrn.239388

Max Gillman

Central European University (CEU) - Department of Economics ( email )

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Michal Kejak (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

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Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

Akos Valentinyi

University of Manchester ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

CERS-HAS ( email )

Budaorsi ut 45
Budapest, 1112
Hungary

CEPR

London
United Kingdom

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