Inflation and Financial Depth

Author/Editor:

Mohsin S. Khan ; Abdelhak S Senhadji ; Bruce D. Smith

Publication Date:

April 1, 2001

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 01/44

Subject:

English

Publication Date:

April 1, 2001

ISBN/ISSN:

9781451846416/1018-5941

Stock No:

WPIEA0442001

Format:

Paper

Pages:

31

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