Inflation, Financial Development, and Growth: A Trilateral Analysis

28 Pages Posted: 13 Jul 2007 Last revised: 25 Apr 2022

See all articles by Peter L. Rousseau

Peter L. Rousseau

Vanderbilt University - Department of Economics

Hakan Yilmazkuday

Florida International University (FIU) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2009

Abstract

A large body of evidence links financial development to economic growth, yet the channels through which inflation affects this relationship and its stability have been less thoroughly explored. We take an econometric and graphical approach to examining these channels, and find that higher levels of financial development, combined with low inflation, are related to higher rates of economic growth, especially in lower-income countries, but that financial development loses much of its explanatory power in the presence of high inflation. In particular, small increases in the price level seem able to wipe out relatively large growth effects of financial deepening when the annual rate of inflation lies between 4 and 19 percent, whereas the operation of the finance-growth link is less affected by inflation rates above this range. Growth is generally much lower, however, in such high inflation settings where financial development is typically repressed.

Keywords: Financial development, Economic growth, Inflation, Cross-country analysis

JEL Classification: E31, E44, O3

Suggested Citation

Rousseau, Peter L. and Yilmazkuday, Hakan, Inflation, Financial Development, and Growth: A Trilateral Analysis (March 1, 2009). Economic Systems, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1000324 or http://dx.doi.org/10.2139/ssrn.1000324

Peter L. Rousseau (Contact Author)

Vanderbilt University - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States
615-343-2466 (Phone)
615-343-8495 (Fax)

HOME PAGE: http://www.vanderbilt.edu/econ/faculty/rousseau.html

Hakan Yilmazkuday

Florida International University (FIU) - Department of Economics ( email )

11200 SW 8th Street
Miami, FL 33199
United States

HOME PAGE: http://faculty.fiu.edu/~hyilmazk/

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