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Inflation, financial development, and growth: A trilateral analysis

  • Rousseau, Peter L.
  • Yilmazkuday, Hakan

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 examining these channels, and find that higher levels of financial development, combined with low-inflation, are related to higher rates of economic growth, especially in lower income 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 growth effects of financial deepening when the annual rate of inflation lies between 4% and 19%, whereas the operation of the finance-growth link is less affected by inflation rates above this range. Growth is generally much lower, however, in such high-inflation settings where financial development is typically repressed.

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Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 33 (2009)
Issue (Month): 4 (December)
Pages: 310-324

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Handle: RePEc:eee:ecosys:v:33:y:2009:i:4:p:310-324
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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, vol. 30(4), pages 657-78, November.
  2. Thorsten Beck & Ross Levine & Norman Loayza, 1999. "Financial Intermediation and Growth: Causality and Causes," Working Papers Central Bank of Chile 56, Central Bank of Chile.
  3. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December.
  4. Joseph H. Haslag & Jahyeong Koo, 1999. "Financial repression, financial development and economic growth," Working Papers 9902, Federal Reserve Bank of Dallas.
  5. Michael Bruno & William Easterly, 1995. "Inflation Crises and Long-Run Growth," NBER Working Papers 5209, National Bureau of Economic Research, Inc.
  6. Demetriades, Panicos O. & Hussein, Khaled A., 1996. "Does financial development cause economic growth? Time-series evidence from 16 countries," Journal of Development Economics, Elsevier, vol. 51(2), pages 387-411, December.
  7. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
  8. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
  9. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
  10. Temple, Jonathan, 2000. " Inflation and Growth: Stories Short and Tall," Journal of Economic Surveys, Wiley Blackwell, vol. 14(4), pages 395-426, September.
  11. repec:ner:tilbur:urn:nbn:nl:ui:12-3125519 is not listed on IDEAS
  12. Rupa Duttagupta & Paul Cashin, 2008. "The Anatomy of Banking Crises," IMF Working Papers 08/93, International Monetary Fund.
  13. Rousseau, Peter L. & Wachtel, Paul, 2002. "Inflation thresholds and the finance-growth nexus," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 777-793, November.
  14. Stanley Fischer, 1995. "Modern Approaches to Central Banking," NBER Working Papers 5064, National Bureau of Economic Research, Inc.
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