Inflation, Financial Development and Endogenous Growth

Abstract

The paper extends the literature on financial development, inflation, and growth by using the idea that both the rates of return on physical and human capital affect growth. This leads to the introduction of the investment rate into the model, as a proxy for the return to physical capital, along with the inflation rate as a variable affecting the return to human capital. As a result financial development plays a different role from the typical growth-enhancing effect found pervasively in the literature. Instead the results suggest a new hypothesis linking financial development to the nature of the effect of inflation on growth.Investment rate, return on capital, panel data, fixed effects