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Inflation and Growth in an Integrated Approach

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  • Michael Bruno
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    Abstract

    Macroeconomic factors in general, and the macropolicy response to common external shocks (such as oil prices and real interest rates) in particular, have in recent decades played a dominant role in countries' protracted growth crises as well as in growth renewal and its long-run sustainability. The paper attempts to construct and apply a simple framework for the joint empirical analysis of growth and inflation, starting from a rudimentary short-term AS and AD framework that is 'averaged' into the medium and long run. For the industrial countries through the 1970s and 1980s such analysis highlights the existence of a marked 20 year inflation and growth 'loop', extending beyond the conventional business cycles, with well identifiable phases of crisis entry, disinflation and partial growth recovery. The interaction of macropolicy response to shocks with structural (mainly labor market) features of economies account for differences across countries both in the depth of the deterioration phase as well as in the gradual recovery, for which a panel regression provides some of the links between inflation, economic activity, profits and investment renewal. The second part of the paper (Section IV) applies similar tools and uncovers analogous, though much more dramatic, 15-20 year loops, in the crisis and recovery of a group of countries in Latin America (as well as Israel). Likewise the strong macro path-dependence of growth in middle-income countries (with cross-country differences in structure and social cohesion) is borne out by comparisons with countries (both in the same region and outside it) that faced similar external shocks yet exhibited much milder 'loops'. The paper ends with a brief reference to some analogies with the sequencing of the cycle of growth crisis, adjustment and structural reform in Eastern Europe.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4422.

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    Date of creation: Aug 1993
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    Publication status: published as With William Easterly, published as "Inflation and Growth: In Search of a Stable Relationship", FRBSL, Vol. 78, no. 3 (May/June 1996): 139-146.
    Handle: RePEc:nbr:nberwo:4422

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    1. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
    2. Tamim Bayoumi and Barry Eichengreen., 1992. "Macroeconomic Adjustment Under Bretton Woods and the Post-Bretton-Woods Float: An Impulse- Response Analysis," Economics Working Papers 92-201, University of California at Berkeley.
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    19. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
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    Cited by:
    1. Michael Bruno & William Easterly, 1995. "Inflation Crises and Long-Run Growth," NBER Working Papers 5209, National Bureau of Economic Research, Inc.
    2. Ciżkowicz, Piotr & Rzońca, Andrzej, 2010. "Inflation and corporate investment in selected OECD countries in the years 1960-2005 – an empirical analysis," MPRA Paper 29846, University Library of Munich, Germany.
    3. Easterly, William & DEC, 1994. "Explaining miracles : growth regressions meet the Gang of Four," Policy Research Working Paper Series 1250, The World Bank.
    4. Fernando Lefort & Klaus Schmidt-Hebbel, 2002. "Indexation, Inflation and Monetary Policy: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Serie (ed.), Indexation, Inflation and MOnetary Policy, edition 1, volume 2, chapter 1, pages 001-018 Central Bank of Chile.
    5. Dabus, C. & Viego, V., 2003. "Inflación, Precios Relativos y Crecimiento: Evidencia de América Latina," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 21, pages 91-107, Abril.

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