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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: [email protected].
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Abstract

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

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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

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