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INFLATION AND FINANCIAL DEPTH

Published online by Cambridge University Press:  24 March 2006

MOHSIN S. KHAN
Affiliation:
International Monetary Fund
ABDELHAK S. SENHADJI
Affiliation:
International Monetary Fund
BRUCE D. SMITH
Affiliation:
University of Texas at Austin

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 about 3–6 percent per annum, depending on the specific measure of financial depth that is utilized.

Type
ARTICLES
Copyright
© 2006 Cambridge University Press

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