Study On The Relationship Between Financial Development And Economic Growth At Different Levels Of Inflation

About the relationship between financial development and economic growth, theliterature at home and abroad has made abundant research achievements. However,whether the relationship under the different economic state will have structuralchange is the main target of the paper to discuss further. And the financial crisis sparkedby the US sub-prime crisis in2007triggered people to think about the relationshipamong inflation, financial development and economic growth, but the researchachievement is comparatively rare. It indicates that in the background of inflation, theguidance to the economic and financial activities, especially for the formulation of thefinancial and economic policies remains to be strengthened.This paper introduces panel threshold auto-regression model, with inflation asthreshold variable, by using the data of26provinces, autonomous regions andmunicipalities in China from1985-2010to inspect whether financial developmentexerts different impact on economic growth in different level of inflation. Theempirical results proposed that there exists the inflation threshold effect in therelationship between financial development and economic growth. In the process offinancial development and economic growth, financial development in low inflationlevel (inflation below0.9%) effectively promotes economic growth. Maintainingmoderate inflation level (inflation between0.9%and5.8%) can make the financialdevelopment play the role of the economic growth more effectively further. Highinflation level (inflation between5.8%and21.6%) or hyperinflation level (inflationhigher than21.6%) will only hinder the financial development from promotingeconomic growth.According to the empirical results, this paper attempts to put forward somesuggestions for economic and financial policy for reference, to better deal with therelationship among the inflation, financial development and economic growth, so asto make the financial development promote the economic growth more effectively.