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Inflation and Financial Depth

  • Mohsin S. Khan
  • A. Senhadji Semlali
  • Bruce D. Smith

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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Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/44.

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Length: 31
Date of creation: 01 Apr 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/44
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  9. Azariadis, Costas & Smith, Bruce D, 1996. " Private Information, Money, and Growth: Indeterminacy, Fluctuations, and the Mundell-Tobin Effect," Journal of Economic Growth, Springer, vol. 1(3), pages 309-32, September.
  10. Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
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  17. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
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