Inflation and Financial Sector Size

Posted: 25 Jun 1998

See all articles by William B. English

William B. English

Board of Governors of the Federal Reserve System

Date Written: April 9, 1996

Abstract

Traditionally the cost of expected inflation has been seen as the "Shoeleather cost" of going to the bank more often. This paper focuses on the other side of these transactions--i.e., on the increased production of financial services by financial firms. I construct a model in which households must make purchases either with cash or with costly transactions services produced by firms in the financial services sector. Higher inflation leads households to substitute purchased transactions services for money balances, increasing the size of the financial sector. A test of the model using cross-sectional data suggests that this effect is large.

JEL Classification: E31

Suggested Citation

English, William B., Inflation and Financial Sector Size (April 9, 1996). Available at SSRN: https://ssrn.com/abstract=7446

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Board of Governors of the Federal Reserve System ( email )

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