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Is Disinflation Good for Growth?

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Author Info
Henry, Peter B. (Stanford U)
Abstract

When countries attempt to stabilize annual inflation rates greater than 40 percent, the domestic stock market appreciates by 24 percent on average. Therefore, the long-run growth benefit of reducing high inflation outweighs the short-run cost. In contrast, the average market response is economically weak and statistically insignificant if the per-stabilization inflation rate is less than 40 percent. Hence, the net growth benefit of reducing moderate inflation is negligible. The first result seems more consistent with the rational expectations view of disinflation than with the traditional view. The second result appears more consistent with the traditional view than with rational expectations. Together, the results suggest that neither view sufficiently captures the real effects of disinflation across all ranges of initial inflation. The stock market responses also help predict the change inflation and output in the following year. This additional result indicates that the stock market evidence for the 81 disinflation episodes studied here is not spurious.

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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1657.

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Date of creation: Oct 2000
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Handle: RePEc:ecl:stabus:1657

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  1. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February. [Downloadable!] (restricted)
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  2. Michael Bruno & William Easterly, 1996. "Inflation's Children: Tales of Crises that Beget Reforms," NBER Working Papers 5452, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Nancy L. Rose, 1985. "The Incidence of Regulatory Rents in the Motor Carrier Industry," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 299-318, Autumn. [Downloadable!] (restricted)
  4. Dornbusch, Rudiger & Fischer, Stanley, 1993. "Moderate Inflation," World Bank Economic Review, Oxford University Press, vol. 7(1), pages 1-44, January.
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  5. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Robert J. Gordon & Stephen R. King, 1982. "The Output Cost of Disinflation in Traditional and Vector Autoregressive Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1982-1), pages 205-244. [Downloadable!]
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  7. Henry, Peter Blair, 2000. "Do stock market liberalizations cause investment booms?," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 301-334. [Downloadable!] (restricted)
  8. Okun, Arthur M, 1978. "Efficient Disinflationary Policies," American Economic Review, American Economic Association, vol. 68(2), pages 348-52, May.
  9. Peter Blair Henry, 2000. "Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices," Journal of Finance, American Finance Association, vol. 55(2), pages 529-564, 04. [Downloadable!] (restricted)
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