Inflation and Financial Depth, Issues 2001-2044
International Monetary Fund, IMF Institute, 2001 - Business & Economics - 30 pages
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.
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Model Specification and Estimation
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adverse selection agents bank lending Boyd and Smith Bruce coefficient confidence intervals credit markets credit rationing CSV problem degree of openness dependent variable dummy variable effect of inflation effect on financial empirical endogenous equation estimation method existence of threshold financial depth financial development financial market financial system Hansen high activity steady higher rates increases in inflation indicators of financial inflation and financial inflation and growth inflation and real instrumental variables Journal of Monetary Khan and Senhadji level of inflation level of real long-run real activity Monetary Economics moral hazard natural lenders NLLS panel PPP GDP problem in credit public consumption rate of inflation rate of money rates of return real growth real rates real returns relationship between inflation residual sum share of GDP statistically significant stock market capitalization stock market development sufficiently high sum of squares theoretical three indicators threshold effects threshold estimates threshold level trend