Liquidity, innovation and growth

Aleksander Berentsen, Mariana Rojas Breu, Shouyong Shi

Research output: Contribution to journalArticle

13 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)721-737
Number of pages17
JournalJournal of Monetary Economics
Volume59
Issue number8
DOIs
StatePublished - Dec 1 2012

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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