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Inflation and Financial Depth

Author

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

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

  • Mr. Bruce D. Smith & Mr. Mohsin S. Khan & Mr. Abdelhak S Senhadji, 2001. "Inflation and Financial Depth," IMF Working Papers 2001/044, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2001/044
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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.
    2. Beatrix Paal & Bruce D. Smith, 2013. "The sub-optimality of the Friedman rule and the optimum quantity of money," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 911-948, November.
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    6. John H. Boyd & Ross Levine & Bruce D. Smith, 1996. "Inflation and financial market performance," Working Papers (Old Series) 9617, Federal Reserve Bank of Cleveland.
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    Keywords

    WP; rate of inflation; financial market; credit rationing; credit market;
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