Institutional Quality and Inflation

The purpose of this paper is to empirically analyze the effects of the quality of institutions on inflation. Using panel data from 1991 to 2007, we find that increase in institutional development which is measured by the ratio of domestic credit to private sector to GDP has significant and sizeable effect on inflation. This paper finds that in countries with high inflation rates, financial sectors cannot resist current levels of inflation and banking system does not decrease inflation in the environment where private banks and financial companies have adapted to existing monetary environment.