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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. Xavier Sala-i-Martin, 1994. "Lecture notes on economic growth (I): Introduction to the literature and Neoclassical models," Economics Working Papers 77, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Edwards, Sebastian, 1992. "Trade orientation, distortions and growth in developing countries," Journal of Development Economics, Elsevier, vol. 39(1), pages 31-57, July.
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  6. 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.
  7. Gylfason, Thorvaldur, 1990. "Inflation, Growth and External Debt: A View of the Landscape," CEPR Discussion Papers 375, C.E.P.R. Discussion Papers.
  8. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
  9. Michael Bruno & William Easterly, 1995. "Inflation Crises and Long-Run Growth," NBER Working Papers 5209, National Bureau of Economic Research, Inc.
  10. Michael Mussa, 1982. "Government Policy and the Adjustment Process," NBER Chapters, in: Import Competition and Response, pages 73-122 National Bureau of Economic Research, Inc.
  11. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  12. Stanley Fischer, 1991. "Growth, Macroeconomics, and Development," NBER Working Papers 3702, National Bureau of Economic Research, Inc.
  13. Easterly, William, 1993. "How much do distortions affect growth?," Journal of Monetary Economics, Elsevier, vol. 32(2), pages 187-212, November.
  14. Fischer, S., 1991. "Growth, Macroeconomics, and Development," Working papers 580, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Miguel Sidrauski, 1967. "Inflation and Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 75, pages 796.
  16. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-39, November.
  17. Gylfason, T, 1995. "The Macroeconomics of European Agriculture," Princeton Studies in International Economics 78, International Economics Section, Departement of Economics Princeton University,.
  18. 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.
  19. 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.
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Cited by:
  1. Frederick H. Wallace & Gary L. Shelley, 2004. "Long Run Neutrality and Superneutrality of Money: Aggregate and Sectoral Tests for Nicaragua," Macroeconomics 0402004, EconWPA.
  2. Agenor, Pierre-Richard, 2002. "Macroeconomic adjustment and the poor : analytical issues and cross-country evidence," Policy Research Working Paper Series 2788, The World Bank.
  3. Thorvaldur Gylfason, 1997. "Exports, Inflation, and Growth," IMF Working Papers 97/119, International Monetary Fund.
  4. 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.
  5. 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.
  6. 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.
  7. Gylfason, Thorvaldur & Herbertsson, Tryggvi Thor, 1996. "Does Inflation Matter for Growth?," CEPR Discussion Papers 1503, C.E.P.R. Discussion Papers.
  8. 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.
  9. 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.

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