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INFLATION AND FINANCIAL DEPTH

Published online by Cambridge University Press:  24 March 2006

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

Keywords

InflationFinancial Depth
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 10 , Issue 2 , April 2006 , pp. 165 - 182
Copyright
© 2006 Cambridge University Press

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