## Financial Markets and Inflation Under Imperfect Information

_IMF Working Papers, June 1, 1994_

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## Bibliographic details
- Authors: Jose De Gregorio, Federico Sturzenegger
- Published: June 1, 1994
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451848359.001

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### Authors and Publication
- By Jose De Gregorio, Federico Sturzenegger
- June 1, 1994
- IMF Working Papers, Working Paper No. 1994/063
- Issue: 063
- Volume: 1994
- Pages: 34
- DOI: https://doi.org/10.5089/9781451848359.001
- Stock No: WPIEA0631994
- ISBN: 9781451848359
- ISSN: 1018-5941

### Research Question and Approach
- Studies the effect of inflation on the operation of financial markets under imperfect information.
- Uses a simple model in which inflation affects firms’ productivity and thereby alters financial intermediaries’ ability to distinguish among heterogeneous firms.

### Key Findings
- Inflation reduces the ability of financial intermediaries to distinguish among heterogeneous firms.
- Productivity differentials among firms narrow as inflation increases.
- Narrowing productivity differentials create incentives for risky and less productive firms to mimic high-productivity firms.
- At high rates of inflation, financial intermediaries may be unable to differentiate among customers, potentially leading to pooling equilibria.

### Theoretical Mechanism (Model Insights)
- Inflation → firms’ productivity affected → productivity differentials narrow.
- Reduced differential → signaling incentives for low-productivity and risky firms to act like high-productivity firms.
- When signals collapse sufficiently, intermediaries cannot separate types, producing pooling outcomes.

### Subjects and Keywords
- Subject: Credit, Inflation, Money, Prices, Production, Productivity, Tax incentives
- Keywords: Credit, firms look, Global, h-firms employment, high-productivity firm, Inflation, low-productivity firm, pooling equilibrium h-firm, Productivity, WP

### Practical Implications (Policy-Relevant Points)
- Higher inflation can impair financial intermediation by worsening information problems between lenders and borrowers.
- The model implies that controlling inflation may preserve the informational role of financial intermediaries and reduce adverse selection/moral hazard incentives from lower-productivity or risky firms.

*IMF Working Paper: "Financial Markets and Inflation Under Imperfect Information", Jose De Gregorio and Federico Sturzenegger, June 1, 1994.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/financial-markets-and-inflation-under-imperfect-information-1217_