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Output Gain From Economic Stabilization

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Author Info

  • Gylfasson, Thorvaldur

    (Department of Economics, University of Iceland)

Abstract

By driving a wedge between the marginal returns to real and financial capital, inflation distorts production. The elimination of this distortion increases both the level and 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 distortion. Third, successful stabilization increases the rate of growth of output per head, and not only its level, in the presence of constant returns to capital in a broad sense. Fourth, substitution of plausible parameter estimates into the simple formulae reflecting the gains from stabilization indicate that the static and dynamic output gains can be substantial.

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Bibliographic Info

Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 606.

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Length: 23 pages
Date of creation: 31 Oct 1997
Date of revision:
Handle: RePEc:hhs:iiessp:0606

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Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
Phone: +46-8-162000
Fax: +46-8-161443
Web page: http://www.iies.su.se/
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Keywords: inflation distorted production;

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References

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  1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  2. Easterly, William & DEC, 1993. "How much do distortions affect growth?," Policy Research Working Paper Series 1215, The World Bank.
  3. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  4. Gylfason, T, 1995. "The Macroeconomics of European Agriculture," Princeton Studies in International Economics 78, International Economics Section, Departement of Economics Princeton University,.
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  8. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
  9. 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.
  10. Miguel Sidrauski, 1967. "Inflation and Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 75, pages 796.
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  12. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 517-33, December.
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  14. Sebastian Edwards, 1991. "Trade Orientation, Distortions and Growth in Developing Countries," NBER Working Papers 3716, National Bureau of Economic Research, Inc.
  15. Fischer, S., 1991. "Growth, Macroeconomics, and Development," Working papers 580, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Gylfason, T., 1992. "Output Gains from Economic Liberalization: A Simple Formula," Papers 514, Stockholm - International Economic Studies.
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Citations

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Cited by:
  1. 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.
  2. Gylfason, Thorvaldur, 2000. "Resources, Agriculture, and Economic Growth in Economies in Transition," Kyklos, Wiley Blackwell, vol. 53(4), pages 545-79.
  3. 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.
  4. 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.
  5. Pierre-Richard Agénor, 2004. "Macroeconomic Adjustment and the Poor: Analytical Issues and Cross-Country Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 18, pages 351-408, 07.
  6. Gylfason, Thorvaldur & Herbertsson, Tryggvi Thor, 1996. "Does Inflation Matter for Growth?," CEPR Discussion Papers 1503, C.E.P.R. Discussion Papers.
  7. Gylfason, Thorvaldur, 1999. "Exports, Inflation and Growth," World Development, Elsevier, vol. 27(6), pages 1031-1057, June.
  8. 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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