INFLATION AND FINANCIAL DEPTH

Mohsin Khan, Abdelhak S. Senhadji and Bruce Smith

Macroeconomic Dynamics, 2006, vol. 10, issue 2, 165-182

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 about 3–6 percent per annum, depending on the specific measure of financial depth that is utilized.

Date: 2006
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Working Paper: Inflation and Financial Depth (2001)
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