Liquidity,innovationandgrowth

Manycountriessimultaneouslysufferfromhighinflation,lowgrowthandpoorly developedfinancialsectors.Inthispaper, weintegrateamicrofoundedmodelof money andfinanceintoamodelofendogenousgrowthtoexaminetheeffectsof inflationonwelfare,growthandthesizeofthefinancialsector.Anovelfeatureis thattheinnovationsectorisdecentralized.Financialintermediariesariseendogen- ously toprovideliquiditytothissector.Consistentwiththedatabutincontrastto previouswork,reducinginflationgenerateslargegrowthgains.Theselargegains cannotbeeasilyreproducedbyimposingacash-in-advanceconstraintinthe innovationsector.