Inflation and the misallocation of resources |
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| Authors: | M Frenkel G Mehrez |
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| Institution: | Department of Economics, WHU Koblenz, Otto Beisheim Graduate School of Management, Burgplatz 2, 56179 Vallendar, Germany Phone: +49 261 6509289 E-mail:;Department of Economics, Georgetown University, Washington, DC 20057-1045, USA Phone: 1 202 687 6172 Fax: 1 202 687 6102 E-mail: |
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| Abstract: | This paper analyzes the effects of inflation on the resource allocation between the financial sector and the manufacturing sector. We develop a model with heterogeneous workers who can be employed either in the manufacturing sector, which produces a consumption good, or the financial sector, which provides liquidity services. A rise in inflation reduces the demand for labor in the manufacturing sector and increases the demand for financial services. This induces a shift of resources from the manufacturing sector to the financial sector and reduces consumption opportunities. An empirical investigation using 55 countries strongly supports the result that higher inflation increases the relative size of the financial sector. |
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