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Inflation, Finance, and Growth: A Trilateral Analysis

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  • Peter L. Rousseau

    ()
    (Department of Economics, Vanderbilt University)

  • Hakan Yilmazkuday

    ()
    (Department of Economics, Temple University)

Abstract

A large body of evidence links financial development to economic growth, yet the channels through which inflation affects this relationship and its stability have been less thoroughly explored. We take an econometric and graphical approach to analyzing these channels, and find that higher levels of financial development, combined with low inflation, are related to higher rates of economic growth, especially in developing countries, but that financial development loses much of its explanatory power in the presence of high inflation. In particular, small increases in the price level seem able to wipe out relatively large efficiency gains achieved through financial deepening when the annual rate of inflation lies between 4 and 19 percent, whereas the operation of the finance-growth link is less affected by higher inflation rates. Growth is generally much lower, however, in such high inflation settings where financial development is typically repressed.

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File URL: http://www.accessecon.com/pubs/VUECON/vu09-w16.pdf
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0916.

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Date of creation: Sep 2009
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Handle: RePEc:van:wpaper:0916

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: Financial development; economic growth; inflation; cross-country analysis;

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References

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  1. Rousseau, Peter L & Wachtel, Paul, 1998. "Financial Intermediation and Economic Performance: Historical Evidence from Five Industrialized Countries," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(4), pages 657-78, November.
  2. de la Grandville,Olivier, 2009. "Economic Growth," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521898010.
  3. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, Elsevier, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
  4. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(3), pages 717-37, August.
  5. Peter L. Rousseau & Paul Wachtel, 2011. "What Is Happening To The Impact Of Financial Deepening On Economic Growth?," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 49(1), pages 276-288, 01.
  6. Pablo Druck & Alexander Plekhanov & Mario Dehesa, 2007. "Relative Price Stability, Creditor Rights, and Financial Deepening," IMF Working Papers 07/139, International Monetary Fund.
  7. Joseph H. Haslag & Jahyeong Koo, 1999. "Financial repression, financial development and economic growth," Working Papers, Federal Reserve Bank of Dallas 9902, Federal Reserve Bank of Dallas.
  8. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 41(1), pages 3-26, February.
  9. Panicos O. Demetriades & Khaled A.Hussein, 1995. "Does Financial Development Cause Economic Growth? Time-Series Evidence from 16 Countries," Keele Department of Economics Discussion Papers (1995-2001), Department of Economics, Keele University 95/13, Department of Economics, Keele University.
  10. Stanley Fischer, 1995. "Modern Approaches to Central Banking," NBER Working Papers 5064, National Bureau of Economic Research, Inc.
  11. Temple, Jonathan, 2000. " Inflation and Growth: Stories Short and Tall," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 14(4), pages 395-426, September.
  12. de la Grandville,Olivier, 2009. "Economic Growth," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521725200.
  13. Rupa Duttagupta & Paul Cashin, 2008. "The Anatomy of Banking Crises," IMF Working Papers 08/93, International Monetary Fund.
  14. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
  15. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(2), pages 221-248, April.
  16. Rousseau, Peter L. & Wachtel, Paul, 2002. "Inflation thresholds and the finance-growth nexus," Journal of International Money and Finance, Elsevier, Elsevier, vol. 21(6), pages 777-793, November.
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Cited by:
  1. Daniel Giedeman & Ryan Compton, 2009. "A note on finance, inflation, and economic growth," Economics Bulletin, AccessEcon, vol. 29(2), pages 749-759.

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