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Inflation and financial sector size

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  • William B. English

Abstract

Traditionally, the cost of expected inflation has been seen as the \"shoeleather cost\" of going to the bank more often. This paper focuses on the other side of these transactions--i.e., on the increased production of financial services by financial firms. I construct a model in which households must make purchases either with cash or with costly transactions services produced by firms in the financial services sector. Higher inflation leads households to substitute purchased transactions services for money balances, increasing the size of the financial sector. A test of the model using cross-sectional data suggests that this effect is large.

Suggested Citation

  • William B. English, 1996. "Inflation and financial sector size," Finance and Economics Discussion Series 96-16, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:96-16
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    References listed on IDEAS

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    Cited by:

    1. Lebdaoui Hind & Wild Joerg, 2016. "Islamic Banking and Financial Development," Review of Middle East Economics and Finance, De Gruyter, vol. 12(2), pages 201-224, August.
    2. Stanley Fischer, 1996. "Why are central banks pursuing long-run price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 7-34.
    3. Christopher Ragan, 1998. "On the Believable Benefits of Low Inflation," Staff Working Papers 98-15, Bank of Canada.
    4. Jeffrey M. Lacker, 1996. "Stored value cards: costly private substitutes for government currency," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-25.
    5. Frederic S Mishkin, 1997. "Strategies for Controlling Inflation," RBA Annual Conference Volume (Discontinued), in: Philip Lowe (ed.),Monetary Policy and Inflation Targeting, Reserve Bank of Australia.
    6. Kenny, Geoff & McGettigan, Donal, 1997. "Low Inflation or Price Stability? A Look at the Issues," Research Technical Papers 3/RT/97, Central Bank of Ireland.
    7. Hasanov, Rashad & Bhattacharya, Prasad Sankar, 2019. "Do political factors influence banking crisis?," Economic Modelling, Elsevier, vol. 76(C), pages 305-318.
    8. Rahul Dhumale, 2000. "Capital Adequacy Standards: Are They Sufficient?," Working Papers wp165, Centre for Business Research, University of Cambridge.
    9. Carlos Fernández, 1999. "Inflation and Welfare: An Application to Chile," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 36(107), pages 519-544.
    10. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.

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