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The inverted-U effect of inflation on growth: Cross-country evidence

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  • He, Qichun

Abstract

What is the effect of inflation on growth? There is no consensus in existing empirical literature. This study argues that the effect may be inverted-U shaped. Using panel data for 154 countries during 1970–2014, both non-parametric cubic spline and parametric regressions show that growth is an inverted-U function of the inflation rate in samples with an annual inflation rate below 30%. The cutoff point for inflation to have a zero marginal effect on growth is around 5% in ordinary least squares estimation and 3% in instrumental variables (IV) estimation. We also find that the share of labor employed in R&D—rather than the physical capital investment rate—is an inverted-U function of inflation in IV estimation. Our inverted-U results are consistent with recent R&D-based theories. Our results on the channels help differentiate R&D-based theories from capital accumulation models, but we need future studies to differentiate between the R&D-based theories.

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  • He, Qichun, 2023. "The inverted-U effect of inflation on growth: Cross-country evidence," Economic Modelling, Elsevier, vol. 128(C).
    • Handle: RePEc:eee:ecmode:v:128:y:2023:i:c:s0264999323003139
    DOI: 10.1016/j.econmod.2023.106501
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    More about this item

    Keywords

    Inflation; Inverted-U; Panel data;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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