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Inflation And Financial Depth

  • KHAN, MOHSIN S.
  • SENHADJI, ABDELHAK S.
  • SMITH, BRUCE D.

There is now a substantial theoretical literature arguing that inflation impedes financial deepening. Furthermore, it has been hypothesized that the relationship is a nonlinear one, in that there is a threshold level of inflation below which inflation has a positive effect on financial depth, but above which the effect turns negative. Using a large cross-country sample, empirical support is found for the existence of such a threshold. The estimates indicate that the threshold level of inflation is generally between 3 and 6 percent a year, depending on the specific measure of financial depth that is used.

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Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 10 (2006)
Issue (Month): 02 (April)
Pages: 165-182

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Handle: RePEc:cup:macdyn:v:10:y:2006:i:02:p:165-182_05
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