Does inflation affect asymmetrically to financial development in India? Fresh insights based on NARDL approach

Abstract

PurposeThis study examines the possibility of asymmetric impact of inflation on the financial development (FD) in the case of Indian economy from 1980 to 2020. Moreover, the finance–growth hypothesis is also tested.Design/methodology/approachThe authors incorporated the “Nonlinear Autoregressive Distributed Lag” (NARDL) model due to Shin et al. (2014) to investigate the asymmetric impact of inflation on financial development. Asymmetric cumulative dynamic multipliers are also used to track the traverse of any short-run distortion towards the long-run cointegration.FindingsThe results revealed that inflation impacts the financial development negatively whereas the economic growth (EG) and trade openness have a positive effect. However, the effect of inflation on financial development is not symmetric. Moreover, the findings support the demand-led growth hypothesis.Originality/valueTo the best of the authors' knowledge, this is the first study examining the asymmetric effects of inflation on financial development in the Indian context. In addition, instead of using a single proxy to measure financial development, an index for financial development encompassing different aspects of the financial system has been incorporated.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-02-2023-0094