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Stylized Facts and Stylized Illusions: Inflation and Productivity Revisited

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  • Norman Cameron
  • Derek Hum
  • Wayne Simpson
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    Abstract

    Recent estimates of a negative empirical relationship between inflation and the rate of growth of productivity provide a strong case for vigorous anti-inflationary policy. This paper tests the robustness of this evidence using long quarterly and annual datasets for four countries (Canada, United States, United Kingdom, West Germany). Our results from cointegration and other time series tests show no evidence for any connection between inflation and the level of productivity. We do find a strong connection between inflation and productivity growth, but it is so internally inconsistent as to be incredible. The best explanation is that it is accounted for entirely by statistical bias from attempting to cointegrate stationary and non-stationary variables.

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    File URL: http://links.jstor.org/sici?sici=0008-4085%28199602%2929%3A1%3C152%3ASFASII%3E2.0.CO%3B2-0
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    Bibliographic Info

    Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

    Volume (Year): 29 (1996)
    Issue (Month): 1 (February)
    Pages: 152-62

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    Handle: RePEc:cje:issued:v:29:y:1996:i:1:p:152-62

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    Cited by:
    1. Donald Freeman & David Yerger, 2000. "Does inflation lower productivity? Time series evidence on the impact of inflation on labor productivity in 12 OECD nations," Atlantic Economic Journal, International Atlantic Economic Society, vol. 28(3), pages 315-332, September.
    2. Ramaprasad Bhar, 2010. "Stochastic Filtering With Applications In Finance:," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7736.
    3. Kumar, Saten & Webber, Don J. & Perry, Geoff, 2009. "Real Wages, Inflation and Labour Productivity in Australia," MPRA Paper 19293, University Library of Munich, Germany.
    4. Ensar Yilmaz, 2010. "Inflation and output in the long and short run in Turkey," Empirica, Springer, vol. 37(3), pages 253-269, July.
    5. Guglielmo Maria Caporale & Luis A. Gil-Alana, 2007. "A Multivariate Long-Memory Model with Structural Breaks," CESifo Working Paper Series 1950, CESifo Group Munich.
    6. João R. Faria & Francisco Galrão Carneiro, 2001. "Does High Inflation Affect Growth in the Long and Short Run?," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 89-105, May.
    7. Arturo Estrella, 2005. "Productivity, monetary policy and financial indicators," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 166-76 Bank for International Settlements.
    8. Hondroyiannis, George & Papapetrou, Evangelia, 1998. "Temporal causality and the inflation-productivity relationship: Evidence from eight low inflation OECD countries," International Review of Economics & Finance, Elsevier, vol. 7(1), pages 117-135.
    9. Ragan, Christopher, 1998. "On the Believable Benefits of Low Inflation," Working Papers 98-15, Bank of Canada.
    10. Ramaprasad Bhar & Girijasankar Mallik, 2012. "Components of Inflation Uncertainty and Interest Rates: Evidence from Australia and New Zealand," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 42(1), pages 39-49, March.
    11. O'Reilly, B., 1998. "The Benefits of Low Inflation: Taking Shock "A nickel ain't worth a dime any more" [Yogi Berra]," Technical Reports 83, Bank of Canada.
    12. Dimitris K. Christopoulos & Efthymios G. Tsionas, 2005. "Productivity growth and inflation in Europe: Evidence from panel cointegration tests," Empirical Economics, Springer, vol. 30(1), pages 137-150, January.
    13. Tim Bulman & John Simon, 2003. "Productivity and Inflation," RBA Research Discussion Papers rdp2003-10, Reserve Bank of Australia.
    14. Mahadevan, Renuka & Asafu-Adjaye, John, 2005. "The productivity-inflation nexus: the case of the Australian mining sector," Energy Economics, Elsevier, vol. 27(1), pages 209-224, January.
    15. Vinayagathasan, Thanabalasingam, 2013. "Inflation and economic growth: A dynamic panel threshold analysis for Asian economies," Journal of Asian Economics, Elsevier, vol. 26(C), pages 31-41.

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