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GROWTH EFFECTS OF INFLATION UNDER THE PRESENCE OF INFORMALITY
Author(s) -
Asfuroglu Dila,
Elgin Ceyhun
Publication year - 2016
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/boer.12057
Subject(s) - economics , inflation (cosmology) , endogenous growth theory , constraint (computer aided design) , panel data , consumption (sociology) , monetary economics , capital (architecture) , cash , growth model , macroeconomics , human capital , econometrics , market economy , mechanical engineering , social science , physics , archaeology , sociology , theoretical physics , engineering , history
ABSTRACT In this paper we build an endogenous growth model in which the informal economy is subject to a cash‐in‐advance constraint along with physical capital accumulation and consumption. In this setting, we find that inflation generally adversely affects long‐run growth. However; this effect strongly interacts with the size of the informal economy. Specifically, the negative effect becomes milder (and can even be positive) under the presence of a large informal economy. Moreover, using an annual cross‐country panel data set of 161 countries over the period 1950‐2010 we also provide some empirical support for the mechanism of our theory.