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Inflation and Financial Depth

Author

Listed:
  • Mohsin S. Khan
  • Abdelhak S Senhadji
  • Bruce D. Smith

Abstract

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.

Suggested Citation

  • Mohsin S. Khan & Abdelhak S Senhadji & Bruce D. Smith, 2001. "Inflation and Financial Depth," IMF Working Papers 01/44, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:01/44
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    References listed on IDEAS

    as
    1. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 195-209.
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    4. John H. Boyd & Ross Levine & Bruce D. Smith, 1996. "Inflation and financial market performance," Working Paper 9617, Federal Reserve Bank of Cleveland.
    5. Gene M. Grossman (ed.), 1996. "Economic Growth," Books, Edward Elgar Publishing, volume 0, number 553, April.
    6. Pennacchi, George G, 1991. "Identifying the Dynamics of Real Interest Rates and Inflation: Evidence Using Survey Data," Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 53-86.
    7. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
    8. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
    9. Huybens, Elisabeth & Smith, Bruce D., 1999. "Inflation, financial markets and long-run real activity," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 283-315, April.
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    19. Mohsin S. Khan & Abdelhak S Senhadji, 2000. "Financial Development and Economic Growth; An Overview," IMF Working Papers 00/209, International Monetary Fund.
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    Keywords

    Inflation; Financial Depth; rate of inflation; rates of inflation; effect of inflation; monetary economics; Financial Institutions And Services; General Financial Markets;

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