High inflations and the financial System

Abstract

The paper surveys the consequences of high inflation for the domestic financial system. The damage that these inflations do to the institutions and markets that finance the growth of financially stable countries is briefly described and explained. Among the effects considered: intermediation is strangled, financial institutions become overstaffed and inefficient, markets for bonds of medium and long term disappear as do contracts of all but the shortest maturities. Moreover, the financial innovation that high inflations trigger, such as indexation and dollarization of various kinds of transactions, are mostly evidence of diversion of talent and energies into financial activities that would be superfluous under conditions of monetary stability.