Book excerpt: This paper presents an extension of Lucas' model of endogenous growth with human capital, showing some linkages with financial intermediation. The model offered in this paper does not imply a univocal relationship between the rates of inflation and economic growth, but it bears an explicit Baumol-Tobin money demand function and a negative association between transactions costs and economic growth. The impact on growth of financial liberalization and every other policy intended to lower transactions costs is twofold. There is a direct positive effect and an ambiguous indirect effect through real balances depending on: (a) the inflation-elasticity of money demand function and the level of the rate of inflation, and (b) the indirect effects on inflation through the marginal productivity of physical capital. Changes in transaction costs do not alter the stock of real balances when the indirect effect through the marginal productivity of physical capital is negligible. In the presence of rational expectations, the effect of the rate of inflation on growth is not definite because the inflation tax revenues exhibit a Laffer curve shape.=20 Complementary simulations with data from the Argentine economy show that the effect of increases in public expenditure on education is not as significant as increases in the external effects of education. Unfortunately it is not easy to separate those effects and to foresee the impact of financial liberalizations. A promising way could be the design of cost efficient court procedures and regulations, but it exceeds the scope of this paper.