Is Inflation a Threat on Financial Sector Performance?

Abstract

This study sought to assess the effect of inflation on financial sector performance by employing panel data from five Ghanaian banks with reference period from 2004 to 2013. Pooled, random effects and generalized method of moment (GMM) models were employed to estimate the effect of inflation on performance of the financial sector. The quadratic function was employed to estimate threshold beyond which it is detrimental to the performance of the financial sector. The study concludes that inflation in the Ghanaian economy will continue to have a positive effect on financial sector development unless it reaches a threshold of 15 percent. The study recommends a threshold level not above 15 percent of inflation to accelerate the development of the financial sector.

Keywords: inflation, performance, financial sector, panel data, Ghana