INFLATION AND FINANCIAL DEPTH
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.
Key Words: Inflation; Financial Depth.
c1 Address correspondence to: Mohsin S. Khan, International Monetary Fund, 700 19th Street, Room 6-328, Washington, DC 20431, USA; e-mail: [email protected].