Inflation and Financial Depth

By Mohsin S. Khan, Abdelhak S Senhadji, Bruce D. Smith

April 1, 2001

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Mohsin S. Khan, Abdelhak S Senhadji, and Bruce D. Smith Inflation and Financial Depth, (USA: International Monetary Fund, 2001) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Financial sector development, Inflation, Market capitalization, Stock markets, Threshold analysis

Keywords: Credit market, Credit rationing, Financial market, Rate of inflation, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2001/044
Stock No:

WPIEA0442001
ISBN:

9781451846416
ISSN:

1018-5941

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