Hostname: page-component-586b7cd67f-tf8b9 Total loading time: 0 Render date: 2024-11-26T13:08:40.104Z Has data issue: false hasContentIssue false

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Azariadis Costas and Bruce D. Smith 1996 Private information, money, and growth: indeterminacy, fluctuations, and the Mundell–Tobin effect. Journal of Economic Growth 1, 309332.Google Scholar
Barro Robert J. 1995 Inflation and economic growth. Bank of England Quarterly Bulletin, 166176.Google Scholar
Beck Thorsten, Asli Demirguc-Kunt, and Ross Levine 1999 A New Database on Financial Development and Structure. New York: Cambridge University Press.
Beck Thorsten, Ross Levine, and Norman Loayza 2000 Financial intermediation and growth: causality and causes. Journal of Monetary Economics 46, 3177.Google Scholar
Bencivenga Valerie R. and Bruce D. Smith 1991 Financial Intermediation and Endogenous Growth. Review of Economic Studies 58, 195209.Google Scholar
Bencivenga Valerie R. and Bruce D. Smith 1992 Deficits, inflation and the banking system in developing countries: the optimal degree of financial repression. Oxford Economic Papers 44, 767790.Google Scholar
Boyd John H., Ross Levine, and Bruce D. Smith 2001 The impact of inflation on financial sector performance. Journal of Monetary Economics 47, 221248.Google Scholar
Bruno Michael and William Easterly 1998 Inflation crises and long-run growth. Journal of Monetary Economics 41, 326.Google Scholar
Bullard James and John Keating 1995 The long-run relationship between inflation and output in postwar economies. Journal of Monetary Economics 36, 477496.Google Scholar
Chan Kung-Sig and Ruey S. Tsay 1998 Limiting properties of the least squares estimator of a continuous threshold autoregressive model. Biometrica 85 (2), 413426.Google Scholar
Cooley Thomas F. and Gary D. Hansen 1989 The inflation tax in a real business cycle model. American Economic Review 79, 733748.Google Scholar
Fischer Stanley 1993 The role of macroeconomic factors in growth. Journal of Monetary Economics 32, 485512.Google Scholar
Ghosh Atish and Steven Phillips 1998 Warning: inflation may be harmful to your growth. IMF Staff Papers 45 (4), 672710.Google Scholar
Greenwood Jeremy and Boyan Jovanovic 1990 Financial development, growth, and the distribution of income. Journal of Political Economy 98, 10761107.Google Scholar
Hansen Bruce 1999 Threshold effects in non-dynamic panels: estimation, testing, and inference. Journal of Econometrics 93 (2), 345368.Google Scholar
Hansen Bruce 2000 Sample splitting and threshold estimation. Econometrica 68 (3), 575605.Google Scholar
Hicks John 1969 A Theory of Economic History. Oxford: Clarendon Press.
Huybens Elisabeth and Bruce D. Smith 1999 Inflation, financial markets, and long-run real activity. Journal of Monetary Economics 43, 283315.Google Scholar
Khan Mohsin S. and Abdelhak Senhadji 2000 Financial Development and Economic Growth. IMF working paper WP/00/209.Google Scholar
Khan Mohsin S. and Abdelhak Senhadji 2001 Threshold effects in the relationship between inflation and growth. IMF Staff Papers 48 (1), 121.Google Scholar
Khan Mohsin S. Abdelhak Senhadji, and Bruce Smith 2001 Inflation and Financial Depth. IMF working paper WP/01/44.Google Scholar
King Robert G. and Ross Levine 1993a Finance and growth: schumpeter might be right. Quarterly Journal of Economics 108, 717738.Google Scholar
King Robert G. and Ross Levine 1993b Finance, entrepreneurship, and growth: theory and evidence. Journal of Monetary Economics 32, 513542.Google Scholar
Levine Ross 1997 Financial development and economic growth: views and agenda. Journal of Economic Literature 35 (2), 688726.Google Scholar
Levine Ross and Sara Zervos 1998 Stock markets, banks, and economic growth. American Economic Review 88, 537558.Google Scholar
McKinnon Ronald I. 1973 Money and Capital in Economic Development. Washington DC: Brookings Institution.
Paal Beatrix and Bruce D. Smith 2000 The Sub-Optimality of the Friedman Rule, and the Optimum Quantity of Money. Mimeograph.Google Scholar
Sarel Michael 1996 Nonlinear effects of inflation on economic growth. IMF Staff Papers 43, 199215.Google Scholar
Shaw Edward S. 1973 Financial Deepening in Economic Development. New York: Oxford University Press.
Stockman Alan 1981 Anticipated inflation and the capital stock in a cash-in-advance economy. Journal of Monetary Economics 8, 387393.Google Scholar