Abstract
It is almost self-evident that capital markets can thrive only in a benign macroeconomic environment. What is often overlooked is that malign macro factors such as inflation and government debt, provided that they are kept under control, can have their bright sides. Previous studies typically presume that the impact of inflation or government debt on capital market development is monotonic, thus precluding the possibility that these factors could be beneficial within a certain limit or threshold. In this study, we take into account this possibility. Our study finds an inverted U-shaped relationship between inflation and the size of the stock market. Hence, inflation within a certain limit may act as a lubricant to the market and help lower the cost of capital in real terms. However, when inflation is too high, long-term investment decisions would be difficult, which is detrimental to stock market growth. An inverted U-shaped relationship is also found between the size of the government bond market and that of the corporate bond market. This suggests that public debt under a certain threshold can benefit corporate bond market development, supporting the notion that the sovereign yield curve plays an important role in pricing private sector debt securities. However, excessive public debt would stifle it.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.