Financial Markets and Inflation Under Imperfect Information
Summary:
This paper studies the effect of inflation on the operation of financial markets, and shows how the ability of financial intermediaries to distinguish among heterogenous firms is reduced as inflation rises. This point is illustrated by presenting a simple model where inflation affects firms’ productivity. In particular, productivity differentials narrow as inflation increases. This effect creates incentives for risky and less productive firms to behave as high productivity firms. At high rates of inflation this may result in financial intermediaries being unable to differentiate among customers.
Series:
Working Paper No. 1994/063
Subject:
Credit Inflation Money Prices Production Productivity Tax incentives
English
Publication Date:
June 1, 1994
ISBN/ISSN:
9781451848359/1018-5941
Stock No:
WPIEA0631994
Pages:
34
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