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Financial markets and inflation under imperfect information

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  • De Gregorio, Jose
  • Sturzenegger, Federico

Abstract

This paper studies the effect of inflation on the operation of financial markets, and shows how the ability of financial intermediaries to distinguish among heterogenous firms is reduced as inflation rises. This point is illustrated by presenting a simple model where inflation affects firms’ productivity. In particular, productivity differentials narrow as inflation increases. This effect creates incentives for risky and less productive firms to behave as high productivity firms. At high rates of inflation this may result in financial intermediaries being unable to differentiate among customers.
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Suggested Citation

  • De Gregorio, Jose & Sturzenegger, Federico, 1997. "Financial markets and inflation under imperfect information," Journal of Development Economics, Elsevier, vol. 54(1), pages 149-168, October.
    • Handle: RePEc:eee:deveco:v:54:y:1997:i:1:p:149-168
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    References listed on IDEAS

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    1. Jose De Gregorio & Federico Sturzenegger, 1994. "Credit Markets and the Welfare Costs of Inflation," NBER Working Papers 4873, National Bureau of Economic Research, Inc.
    2. R McKinnon, 1991. "Financial Control in the Transition to a Market Economy," CEP Discussion Papers dp0040, Centre for Economic Performance, LSE.
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    5. Mariano Tommasi, 1996. "High inflation: resource misallocations and growth effects," Estudios de Economia, University of Chile, Department of Economics, vol. 23(2 Year 19), pages 157-177, December.
    6. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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    9. Casella, Alessandra & Feinstein, Jonathan S, 1990. "Economic Exchange during Hyperinflation," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 1-27, February.
    10. A. Leijonhufvud, 1977. "Costs and Consequences of Inflation," International Economic Association Series, in: G. C. Harcourt (ed.), The Microeconomic Foundations of Macroeconomics, chapter 9, pages 265-327, Palgrave Macmillan.
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    3. Andres, Javier & Hernando, Ignacio & Lopez-Salido, J. David, 2004. "The role of the financial system in the growth-inflation link: the OECD experience," European Journal of Political Economy, Elsevier, vol. 20(4), pages 941-961, November.
    4. Smith, R. Todd & van Egteren, Henry, 2005. "Inflation, investment and economic performance: The role of internal financing," European Economic Review, Elsevier, vol. 49(5), pages 1283-1303, July.
    5. Qayyum, Abdul & Siddiqui, Rehana & Hanif, Muhammad Nadim, 2004. "Financial Development and Economic Growth: Evidence from Heterogeneous Panel Data of Low Income Countries," MPRA Paper 23431, University Library of Munich, Germany.
    6. Jose De Gregorio & Federico Sturzenegger, 1994. "Credit Markets and the Welfare Costs of Inflation," NBER Working Papers 4873, National Bureau of Economic Research, Inc.
    7. Blommstein, Hans J. & Spencer, Michael G., 1996. "Sound finance and the wealth of nations," The North American Journal of Economics and Finance, Elsevier, vol. 7(2), pages 115-124.
    8. Zerbini, Maria Beatriz & Rocha, Fabiana, 2002. "Private sector credit and inflation during Brazilian stabilization plans: Models with endogenously determined structural breaks," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 22(2), November.
    9. A.R. Kemal & Abdul Qayyum & Muhammad Nadim Hanif, 2007. "Financial Development and Economic Growth: Evidence from a Heterogeneous Panel of High Income Countries," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 12(1), pages 1-34, Jan-Jun.
    10. Manav Raj, 2021. "A house divided: Legislative competition and young firm survival in the United States," Strategic Management Journal, Wiley Blackwell, vol. 42(13), pages 2389-2419, December.
    11. de Mello, Luiz & Pisu, Mauro, 2010. "The bank lending channel of monetary transmission in Brazil: A VECM approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(1), pages 50-60, February.
    12. Nwakanma Prince Chinaecherem & Ifeanyi Mgbataogu, 2013. "Influence of Interest Rates Regimes on Deposit Money Banks’ Credit in Nigeria: An Econometric Assessment," International Journal of Empirical Finance, Research Academy of Social Sciences, vol. 1(3), pages 52-64.

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