Inflation, Liquidity and Innovation

Inflation, Liquidity and Innovation

This paper presents a simple model with financial frictions where inflation increases the cost faced by firms holding liquid assets to hedge risky production against expenditure shocks. Inflation tilts firms' technology choice away from innova...

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Main Authors: Evers, Michael, Niemann, Stefan, Schiffbauer, Marc
Format: Working Paper
Language:English
Published: World Bank, Washington, DC 2018
Subjects:
INFLATION
LIQUIDITY
INNOVATION
INVESTMENT
TECHNOLOGY
TECHNOLOGICAL CHANGE
Online Access:http://documents.worldbank.org/curated/en/544711525968321874/Inflation-liquidity-and-innovation
http://hdl.handle.net/10986/29842
id okr-10986-29842
recordtype oai_dc
spelling okr-10986-298422021-06-08T14:42:46Z Inflation, Liquidity and Innovation Evers, Michael Niemann, Stefan Schiffbauer, Marc INFLATION LIQUIDITY INNOVATION INVESTMENT TECHNOLOGY TECHNOLOGICAL CHANGE This paper presents a simple model with financial frictions where inflation increases the cost faced by firms holding liquid assets to hedge risky production against expenditure shocks. Inflation tilts firms' technology choice away from innovative activities and toward safer but return-dominated ones, and therefore reduces long-run growth. The theory makes specific predictions about how the severity of this adverse effect depends on industry characteristics. These predictions are tested with novel harmonized firm-level data from 139 developing countries, overcoming small sample problems constraining previous work. The analysis finds that inflation affects the composition but not the overall quantity of investment. A one percentage point increase in inflation reduces the establishment-level probability of innovation by 4.3 percent but does not affect total investment. Moreover, innovating firms display a stronger dependence on liquid assets, which, in turn, are negatively related to inflation. Generalized difference-in-differences estimations corroborate the sector-specific predictions of the theoretical model. 2018-05-16T20:22:26Z 2018-05-16T20:22:26Z 2018-05 Working Paper http://documents.worldbank.org/curated/en/544711525968321874/Inflation-liquidity-and-innovation http://hdl.handle.net/10986/29842 English Policy Research Working Paper;No. 8436 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper
repository_type Digital Repository
institution_category Foreign Institution
institution Digital Repositories
building World Bank Open Knowledge Repository
collection World Bank
language English
topic INFLATION
LIQUIDITY
INNOVATION
INVESTMENT
TECHNOLOGY
TECHNOLOGICAL CHANGE
spellingShingle INFLATION
LIQUIDITY
INNOVATION
INVESTMENT
TECHNOLOGY
TECHNOLOGICAL CHANGE
Evers, Michael
Niemann, Stefan
Schiffbauer, Marc
Inflation, Liquidity and Innovation
relation Policy Research Working Paper;No. 8436
description This paper presents a simple model with financial frictions where inflation increases the cost faced by firms holding liquid assets to hedge risky production against expenditure shocks. Inflation tilts firms' technology choice away from innovative activities and toward safer but return-dominated ones, and therefore reduces long-run growth. The theory makes specific predictions about how the severity of this adverse effect depends on industry characteristics. These predictions are tested with novel harmonized firm-level data from 139 developing countries, overcoming small sample problems constraining previous work. The analysis finds that inflation affects the composition but not the overall quantity of investment. A one percentage point increase in inflation reduces the establishment-level probability of innovation by 4.3 percent but does not affect total investment. Moreover, innovating firms display a stronger dependence on liquid assets, which, in turn, are negatively related to inflation. Generalized difference-in-differences estimations corroborate the sector-specific predictions of the theoretical model.
format Working Paper
author Evers, Michael
Niemann, Stefan
Schiffbauer, Marc
author_facet Evers, Michael
Niemann, Stefan
Schiffbauer, Marc
author_sort Evers, Michael
title Inflation, Liquidity and Innovation
title_short Inflation, Liquidity and Innovation
title_full Inflation, Liquidity and Innovation
title_fullStr Inflation, Liquidity and Innovation
title_full_unstemmed Inflation, Liquidity and Innovation
title_sort inflation, liquidity and innovation
publisher World Bank, Washington, DC
publishDate 2018
url http://documents.worldbank.org/curated/en/544711525968321874/Inflation-liquidity-and-innovation
http://hdl.handle.net/10986/29842
_version_ 1764470527361024000

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