| Abstract:
Part of harmful effects of inflation on the economy stems from the financial sector This paper argues that inflation shifts resources from manufacturing sector to financial sector leading to an increase in the relative size of financial sector. This shift of resources can be viewed as a harmful effect of inflation, because if inflation were lower, the resources could be used directly to increase production of goods.
Using Johanson's methodology and data of Iran in 1343-1385, we find that the relative size of financial sector is strongly affected by inflation.
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