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Output Gains from Economic Stabilization

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  • Gylfason, T.

Abstract

By driving a wedge between the marginal returns to real and financial capital, inflation distorts production. The elimination of this distorsion increases both the level and the rate of growth of output. First, increased price stability improves the utilization of capital and thus increases the full-employment level of output in the long run, even though output decreases initially. Second, the static output gain from stabilization is captured in a simple formula in which the gain is approximately proportional to the square of the original inflation distorsion.

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Bibliographic Info

Paper provided by Stockholm - International Economic Studies in its series Papers with number 606.

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Length: 22 pages
Date of creation: 1996
Date of revision:
Handle: RePEc:fth:stocin:606

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Keywords: PRICES; PRODUCTION; INFLATION;

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References

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  1. Lee A. Lillard, 1973. "Human Capital Life Cycle of Earnings Models: A Specific Solution and Estimation," NBER Working Papers 0004, National Bureau of Economic Research, Inc.
  2. Thorvaldur Gylfason, 1991. "Inflation, Growth, and External Debt: A View of the Landscape," The World Economy, Wiley Blackwell, vol. 14(3), pages 279-297, 09.
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  6. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank.
  7. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 517-33, December.
  8. Sebastian Edwards, 1991. "Trade Orientation, Distortions and Growth in Developing Countries," NBER Working Papers 3716, National Bureau of Economic Research, Inc.
  9. Lee A. Lillard, 1973. "Human Capital Life Cycle of Earnings Models: A Specific Solution and Estimation," NBER Working Papers 0004, National Bureau of Economic Research, Inc.
  10. Dixit, Avinash, 1985. "Tax policy in open economies," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 6, pages 313-374 Elsevier.
  11. Easterly, William, 1993. "How much do distortions affect growth?," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 187-212, November.
  12. Stanley Fischer, 1991. "Growth, Macroeconomics, and Development," NBER Working Papers 3702, National Bureau of Economic Research, Inc.
  13. Gylfason, T, 1995. "The Macroeconomics of European Agriculture," Princeton Studies in International Economics 78, International Economics Section, Departement of Economics Princeton University,.
  14. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-39, November.
  15. Gylfason, T., 1992. "Output Gains from Economic Liberalization: A Simple Formula," Papers 514, Stockholm - International Economic Studies.
  16. Fischer, S., 1991. "Growth, Macroeconomics, and Development," Working papers 580, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. Arnold Harberger, 1964. "Taxation, Resource Allocation, and Welfare," NBER Chapters, in: The Role of Direct and Indirect Taxes in the Federal Reserve System, pages 25-80 National Bureau of Economic Research, Inc.
  18. Miguel Sidrauski, 1967. "Inflation and Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 75, pages 796.
  19. Xavier Sala-i-Martin, 1990. "Lecture Notes on Economic Growth(I): Introduction to the Literature and Neoclassical Models," NBER Working Papers 3563, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Thorvaldur Gylfason, 2000. "Resources, Agriculture, and Economic Growth in Economies in Transition," CERGE-EI Working Papers wp157, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  2. 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.
  3. Jesper Rangvid, 2007. "The Effects of Temporary Exchange-Rate-Based Stabilizations when Money Serves a Productive Role," Open Economies Review, Springer, vol. 18(4), pages 453-477, September.
  4. Gylfason, Thorvaldur, 1999. "Exports, Inflation and Growth," World Development, Elsevier, vol. 27(6), pages 1031-1057, June.
  5. Gylfason, Thorvaldur & Herbertsson, Tryggvi Thor, 2001. "Does inflation matter for growth?," Japan and the World Economy, Elsevier, vol. 13(4), pages 405-428, December.
  6. Yesim Kustepeli, 2003. "The Effect of Nominal Government Deficits on Economic Growth," Ege Academic Review, Ege University Faculty of Economics and Administrative Sciences, vol. 3(1), pages 47-57.
  7. Agenor, Pierre-Richard, 2002. "Macroeconomic adjustment and the poor : analytical issues and cross-country evidence," Policy Research Working Paper Series 2788, The World Bank.
  8. Chani, Muhammad Irfan & Pervaiz, Zahid & Jan, Sajjad Ahmad & Ali, Amjad & Chaudhary, Amatul R., 2011. "Poverty, inflation and economic growth: empirical evidence from Pakistan," MPRA Paper 34290, University Library of Munich, Germany, revised 2011.
  9. Frederick H. Wallace & Gary L. Shelley, 2004. "Long Run Neutrality and Superneutrality of Money: Aggregate and Sectoral Tests for Nicaragua," Macroeconomics 0402004, EconWPA.

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