Financial Markets and Inflation Under Imperfect Information

Author/Editor:

Jose De Gregorio ; Federico Sturzenegger

Publication Date:

June 1, 1994

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper studies the effect of inflation on the operation of financial markets, and shows how the ability of financial intermediaries to distinguish among heterogenous firms is reduced as inflation rises. This point is illustrated by presenting a simple model where inflation affects firms’ productivity. In particular, productivity differentials narrow as inflation increases. This effect creates incentives for risky and less productive firms to behave as high productivity firms. At high rates of inflation this may result in financial intermediaries being unable to differentiate among customers.

Series:

Working Paper No. 1994/063

Subject:

Credit Inflation Money Prices Production Productivity Tax incentives

English

Publication Date:

June 1, 1994

ISBN/ISSN:

9781451848359/1018-5941

Stock No:

WPIEA0631994

Pages:

34

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