Inflation and Financial Depth

31 Pages Posted: 30 Jan 2006

See all articles by Mohsin S. Khan

Mohsin S. Khan

International Monetary Fund (IMF)

Abdelhak S. Senhadji

International Monetary Fund (IMF)

Bruce D. Smith

University of Texas at Austin (Deceased)

Date Written: April 2001

Abstract

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.

Keywords: Inflation, Financial Depth

JEL Classification: G2, G1, E31

Suggested Citation

Khan, Mohsin S. and Senhadji, Abdelhak S. and Smith, Bruce D., Inflation and Financial Depth (April 2001). IMF Working Paper No. 01/44, Available at SSRN: https://ssrn.com/abstract=879432

Mohsin S. Khan (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4518 (Phone)
202-623-6440 (Fax)

Abdelhak S. Senhadji

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Bruce D. Smith

University of Texas at Austin (Deceased)

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