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The Impact of Inflation on Financial Sector Performance: Evidence from OECD Countries

Author

Listed:
  • Bilalli Argjira

    (Faculty of Business and Economics, “Southeast European University” -Tetovo, North Macedonia.)

  • Sadiku Murat

    (Faculty of Business and Economics, “Southeast European University” -Tetovo, North Macedonia.)

  • Sadiku Luljeta

    (Faculty of Economics and Administrative Sciences, “International Balkan University” - Skopje, North Macedonia)

Abstract

This research article investigates the relationship between inflation and the performance of the financial sector within OECD countries, a group critical to global economic stability. The financial sector is a basis of sustainable economic growth, and its performance is heavily influenced by the macroeconomic environment, particularly inflation. This study analyses how inflation, alongside other significant factors such as real GDP growth, government size, trade openness, and interest rates, impacts the financial sector development. By examining data from 38 OECD countries over a 20-year period (2002-2021), this research employs a comprehensive approach using both static and dynamic panel regression models. The results consistently indicate a negative correlation between inflation and the key financial sector variables, suggesting that higher inflation levels undermine financial sector performance. These findings underscore the importance of maintaining low and stable inflation to foster an efficient and stable financial sector. This study makes a valuable contribution to the literature by focusing specifically on OECD countries, which are often seen as benchmarks for economic policies and financial systems.

Suggested Citation

  • Bilalli Argjira & Sadiku Murat & Sadiku Luljeta, 2024. "The Impact of Inflation on Financial Sector Performance: Evidence from OECD Countries," Economics, Sciendo, vol. 12(2), pages 263-276.
    • Handle: RePEc:vrs:econom:v:12:y:2024:i:2:p:263-276:n:1015
    DOI: 10.2478/eoik-2024-0028
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    References listed on IDEAS

    as
    1. Berentsen, Aleksander & Rojas Breu, Mariana & Shi, Shouyong, 2012. "Liquidity, innovation and growth," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 721-737.
    2. Rousseau, Peter L. & Yilmazkuday, Hakan, 2009. "Inflation, financial development, and growth: A trilateral analysis," Economic Systems, Elsevier, vol. 33(4), pages 310-324, December.
    3. Shahzad Ijaz & Arshad Hassan & Amine Tarazi & Ahmad Fraz, 2020. "Linking Bank Competition, Financial Stability, And Economic Growth," Post-Print hal-02475572, HAL.
    4. repec:dau:papers:123456789/7354 is not listed on IDEAS
    5. John H. Boyd & Bruce A. Champ, 2003. "Inflation and financial market performance: what have we learned in the last ten years?," Working Papers (Old Series) 0317, Federal Reserve Bank of Cleveland.
    6. Robert L. Hetzel, 2004. "How do central banks control inflation?," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 90(Sum), pages 46-63.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Inflation; Financial sector; Panel data regression; OECD Countries;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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