Financial Markets and Inflation Under Imperfect Information

34 Pages Posted: 15 Feb 2006

See all articles by Jose de Gregorio

Jose de Gregorio

Central Bank of Chile; Universidad de Chile; National Bureau of Economic Research (NBER)

Federico Sturzenegger

Universidad Torcuato Di Tella; Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: June 1994

Abstract

This paper studies the effect of inflation on the operation of financial markets, and shows how the ability of financial intermediaries to distinguish among heterogenous firms is reduced as inflation rises. This point is illustrated by presenting a simple model where inflation affects firms` productivity. In particular, productivity differentials narrow as inflation increases. This effect creates incentives for risky and less productive firms to behave as high productivity firms. At high rates of inflation this may result in financial intermediaries being unable to differentiate among customers.

JEL Classification: E31, E44

Suggested Citation

de Gregorio, Jose and Sturzenegger, Federico, Financial Markets and Inflation Under Imperfect Information (June 1994). IMF Working Paper No. 94/63, Available at SSRN: https://ssrn.com/abstract=883542

Jose De Gregorio (Contact Author)

Central Bank of Chile ( email )

Agustinas 1180
Santiago
Chile

Universidad de Chile ( email )

Ministry of Finance Teatinos l20 - Piso l2
Santiago
Chile

National Bureau of Economic Research (NBER)

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Federico Sturzenegger

Universidad Torcuato Di Tella ( email )

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Argentina

Harvard University - Harvard Kennedy School (HKS) ( email )

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National Bureau of Economic Research (NBER)

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