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When Does Inflation Hurt Economic Growth? Different Nonlinearities for Different Economies

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  • Richard C.K. Burdekin

    (Claremont McKenna College)

  • Arthur T. Denzau

    (Claremont Graduate University)

  • Manfred W. Keil

    (Claremont McKenna College)

  • Thitithep Sitthiyot

    (Claremont Graduate University)

  • Thomas D. Willett

    (Claremont McKenna College and Claremont Graduate University.)

Abstract

We show that the effects of inflation on growth change substantially as the inflation rate rises. Moreover the nonlinearities are quite different for industrial economies than for developing countries. We find that the threshold at which inflation first begins to seriously negatively affect growth is around 8% for industrial economies but 3% or less for developing countries. Marginal growth costs for developing countries then decline significantly above 50% inflation. Failure to account for nonlinearity biases downward the estimated effects of inflation on growth. Mixing industrial and developing economies together also produces unreliable results.

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Paper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 2000-22.

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Handle: RePEc:clm:clmeco:2000-22

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Keywords: inflation; growth; non-linearity;

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  1. Khan, Mohsin S. & Senhadji, Abdelhak S. & Smith, Bruce D., 2006. "Inflation And Financial Depth," Macroeconomic Dynamics, Cambridge University Press, vol. 10(02), pages 165-182, April.
  2. Peter Doyle & Peter F. Christoffersen, 1998. "From Inflation to Growth," IMF Working Papers 98/100, International Monetary Fund.
  3. Atish Ghosh & Steven Phillips, 1998. "Warning: Inflation May Be Harmful to Your Growth," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 672-710, December.
  4. Amato, Jeffery D. & Gerlach, Stefan, 2002. "Inflation targeting in emerging market and transition economies: Lessons after a decade," European Economic Review, Elsevier, vol. 46(4-5), pages 781-790, May.
  5. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
  6. Robert J. Barro, 1996. "Inflation and growth," Review, Federal Reserve Bank of St. Louis, issue May, pages 153-169.
  7. By Mohsin S. Khan & Abdelhak S. Senhadji, 2001. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 1.
  8. Ruth Judson & Athanasios Orphanides, 1996. "Inflation, volatility and growth," Finance and Economics Discussion Series 96-19, Board of Governors of the Federal Reserve System (U.S.).
  9. Brian Motley, 1998. "Growth and inflation: a cross-country study," Economic Review, Federal Reserve Bank of San Francisco, pages 15-28.
  10. Michael Sarel, 1996. "Nonlinear Effects of Inflation on Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 199-215, March.
  11. Richard C.K. Burdekin & Arthur T. Denzau & Manfred W. Keil & Thitithep Sitthiyot & Thomas D. Willett, . "Nonlinear Effects of Inflation on Growth: Comment," Claremont Colleges Working Papers 2000-23, Claremont Colleges.
  12. Sung Kim & Thomas Willett, 2000. "Is the negative correlation between inflation and growth real? An analysis of the effects of the oil supply shocks," Applied Economics Letters, Taylor & Francis Journals, vol. 7(3), pages 141-147.
  13. Torsten Sløk & Sanja Kalra, 1999. "Inflation and Growth in Transition," IMF Working Papers 99/118, International Monetary Fund.
  14. Atish R. Ghosh & Steven Phillips, 1998. "Inflation, Disinflation, and Growth," IMF Working Papers 98/68, International Monetary Fund.
  15. Richard Burdekin & Thomas Goodwin & Suyono Salamun & Thomas Willett, 1994. "The effects of inflation on economic growth in industrial and developing countries: is there a difference?," Applied Economics Letters, Taylor & Francis Journals, vol. 1(10), pages 175-177.
  16. Helmut Schlesinger, 1984. "The role of the central bank in achieving price stability: an international perspective," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 97-103.
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