Liquidity Risk And Banks? Asset Composition: Implications For Monetary Policy

Date Added: Jun 2009
Format: PDF

Monetary growth models in which the government is a net debtor demonstrate that inflation adversely affects capital formation through the crowding out effect. Interestingly, the results are at odds with empirical evidence. In particular, recent studies point out to an asymmetric relationship between inflation and the real economy across countries. Specifically, inflation and output are negatively correlated in poor countries. In contrast, inflation is associated with higher levels of economic activity in advanced economies. The author presents a monetary growth model where the exposure to risk is inversely related to the level of income.