Essays on inflation and growth

This dissertation investigates the relationship between inflation and economic growth emphasizing the financial sector and differences across countries.The first essay uses a cash-in-advance model with credit as an alternative means of payment and simulates several steady-state relationships. Exogenous financial innovations lead to upward trending velocity as has been observed in the last half century or more. Differences in financial innovation across countries, or within a country and across time, affects how inflation affects output growth. Lower costs of intermediation imply that inflation affects output less than in countries with higher costs and similar effects hold within the same country when intermediation costs have changed over time. Either case presents difficulties for empirical tests.The second essay examines the robustness of empirical inflation-growth results. Bayesian Model Averaging is used to explore the relationship between inflation and growth. Cross-sectional data over long periods of time provide no evidence of an inflation-growth relationship. Panel data, using 5-year averages, produces starkly different results, in particular, inflation is one of the more robust variables. Threshold affects are discussed but do not alter the main conclusions. Parameter heterogeneity across countries is investigated with the finding that coefficients vary widely with even small changes in the sample. The negative relationship of inflation and growth is still strong, but the importance of the point estimates is questionable.The third essay utilizes standard time series methods. Structural inflation shocks are identified by imposing long-run restrictions on the model, and the effects of inflation on separate sectors of the economy are examined. This approach is applied to seven industrialized countries, with the results that inflation affects sectoral output differently, with little similarity across countries. Sectors such as manufacturing, agriculture and finance seem to be affected in quite different manners. The agriculture sector suggests that inflation may be harmful to growth, but the evidence is weak. Inflation is positively related to manufacturing growth and this is significant in most countries. Inflation is positively related to the finance sector in three countries and has no long run effect in four countries.