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MACROECONOMIC INSTABILITY AND GROWTH: Panel Data Analysis of Causal and Cyclical Patterns

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Author Info
Arai, Mahmood () (Dept. of Economics, Stockholm University)
Kinnwall, Mats () (Handelsbanken Markets, Stockholm)

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Abstract

Empirical foundations for the view that high central government deficits and inflation impair growth are examined using annual data for 115 countries over the period 1960-1995. Taking into account country heterogeneity and time-specific symmetric shocks, we estimate intra-country effects of past inflation and budget deficits on growth. WE find no evidence suggesting growth costs of macroeconomic instability. Rather our results indicate reversed causality: the rate of growth determines inflation and deficits. On the other hand, there is a negative correlation between contemporaneous intra-country inflation and growth for two subperiods: the 1970s/early 1980s, influenced by adverse supply shocks, and the early 1990s characterised by adverse demand shocks. We argue that these results are compatible with a standard, stochastic macro theoretical framework.

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Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 1997:8.

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Length: 14 pages
Date of creation: 17 Apr 1998
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Handle: RePEc:hhs:sunrpe:1997_0008

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Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
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Related research
Keywords: Growth; Inflation; Budget Deficits;

Find related papers by JEL classification:
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O57 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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  1. Blanchard, Olivier Jean, 1990. "Why does money affect output? A survey," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 15, pages 779-835 Elsevier. [Downloadable!] (restricted)
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  2. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. 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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  4. Stanley Fischer & Franco Modigliani, 1978. "Towards an understanding of the real effects and costs of inflation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 114(4), pages 810-833, December. [Downloadable!] (restricted)
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