Financial Markets and Inflation Under Imperfect Information
34 Pages Posted: 15 Feb 2006
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: Suggested Citation
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