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 Senhadji

International Monetary Fund (IMF) - Asia and Pacific Department

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 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 Senhadji

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Bruce D. Smith

University of Texas at Austin (Deceased)

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