Inflation and Financial Depth
April 1, 2001
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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.
Subject: Financial sector development, Inflation, Market capitalization, Stock markets, Threshold analysis
Keywords: credit market, credit rationing, financial market, rate of inflation, WP
Pages:
31
Volume:
2001
DOI:
Issue:
044
Series:
Working Paper No. 2001/044
Stock No:
WPIEA0442001
ISBN:
9781451846416
ISSN:
1018-5941
