Inflation Thresholds and the Finance-Growth Nexus

23 Pages Posted: 25 Sep 2002

See all articles by Peter L. Rousseau

Peter L. Rousseau

Vanderbilt University - Department of Economics

Paul Wachtel

New York University - Stern School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 2, 2002

Abstract

The robustness of the cross-sectional relationship between the size of a country's financial sector and its rate of economic growth is by now well established. In this article, we examine whether the strength of this relationship varies with the inflation rate. Using five-year averages of standard measures of financial development, inflation, and growth for 84 countries from 1960 to 1995, a series of rolling panel regressions show that there is an inflation threshold for the finance-growth relationship that lies between 13 and 25 percent. When inflation exceeds the threshold, finance ceases to increase economic growth. We also find that the level of financial depth varies inversely with inflation in low-inflation environments and that disinflation is associated with a positive effect of financial depth on growth.

Keywords: Financial development, Economic growth, Inflation, Financial repression, Cross-country regression

JEL Classification: E31, E44, F36

Suggested Citation

Rousseau, Peter L. and Wachtel, Paul, Inflation Thresholds and the Finance-Growth Nexus (May 2, 2002). Available at SSRN: https://ssrn.com/abstract=315967 or http://dx.doi.org/10.2139/ssrn.315967

Peter L. Rousseau

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

Paul Wachtel (Contact Author)

New York University - Stern School of Business ( email )

44 West 4th St.
New York, NY 10012
United States
212-998-4030 (Phone)
212-995-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~pwachtel

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