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Productivity and Inflation

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  • Tim Bulman

    (Reserve Bank of Australia)

  • John Simon

    (Reserve Bank of Australia)

Abstract

This paper examines the effect of inflation on productivity growth in Australia. Broad historical correlations suggest a negative relationship between inflation and aggregate productivity growth. The low-frequency nature of the relationship, however, means it is difficult to establish statistical causation at the aggregate level. We look at the industry-level relationships in an effort to overcome this limitation and to understand the relationship better. On this level we find clearly significant results with industry-level inflation explaining industry productivity. We also find that the relationship varies by industry, with the strongest evidence of a negative relationship being found in the cases of concentrated industries, i.e., those dominated by large firms. Finally, we find evidence that the negative effects of inflation on productivity do not operate solely through a reduction in capital accumulation but also through a reduction in multifactor productivity growth.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2003-10.

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Date of creation: Sep 2003
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Handle: RePEc:rba:rbardp:rdp2003-10

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Keywords: inflation; productivity; industrial structure;

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References

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  1. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  2. David Gruen & Tim Robinson & Andrew Stone, 2002. "Output Gaps in Real Time: Are They Reliable Enough to Use for Monetary Policy?," RBA Research Discussion Papers rdp2002-06, Reserve Bank of Australia.
  3. Jarrett, J Peter & Selody, Jack G, 1982. "The Productivity-Inflation Nexus in Canada, 1963-1979," The Review of Economics and Statistics, MIT Press, vol. 64(3), pages 361-67, August.
  4. John Simon & Sharon Wardrop, 2002. "Australian Use of Information Technology and its Contribution to Growth," RBA Research Discussion Papers rdp2002-02, Reserve Bank of Australia.
  5. Donald Freeman & David Yerger, 2000. "Does inflation lower productivity? Time series evidence on the impact of inflation on labor productivity in 12 OECD nations," Atlantic Economic Journal, International Atlantic Economic Society, vol. 28(3), pages 315-332, September.
  6. Martin Feldstein, 1980. "Inflation, Tax Rules, and Investment: Some Econometric Evidence," NBER Working Papers 0577, National Bureau of Economic Research, Inc.
  7. Chowdhury, Anis & Mallik, Girijasankar, 1998. "A Land Locked into Low Inflation--How Far Is the Promised Land?," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 28(2), pages 233-243, September.
  8. Ram, Rati, 1984. "Causal Ordering across Inflation and Productivity Growth in the Post-war United States," The Review of Economics and Statistics, MIT Press, vol. 66(3), pages 472-77, August.
  9. Argia Sbordone & Kenneth Kuttner, 1994. "Does inflation reduce productivity?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 2-14.
  10. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  11. Tsionas, Efthymios G., 2001. "Euro-land: any good for the European South?," Journal of Policy Modeling, Elsevier, vol. 23(1), pages 67-81, January.
  12. David Smyth, 1995. "The supply side effects of inflation in the United States: evidence from multifactor productivity," Applied Economics Letters, Taylor & Francis Journals, vol. 2(12), pages 482-483.
  13. Baltagi, Badi H & Griffin, James M & Rich, Daniel P, 1995. "The Measurement of Firm-Specific Indexes of Technical Change," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 654-63, November.
  14. Andrew J. Buck & Felix Fitzroy, 1988. "Inflation and Productivity Growth in the Federal Republic of Germany," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 10(3), pages 428-444, April.
  15. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  16. David F. Hendry, 2001. "Modelling UK inflation, 1875-1991," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 255-275.
  17. Jakob Madsen & Richard Damania, 2001. "Labour Demand and Wage-induced Innovations: Evidence from the OECD countries," International Review of Applied Economics, Taylor & Francis Journals, vol. 15(3), pages 323-334.
  18. Norman Cameron & Derek Hum & Wayne Simpson, 1996. "Stylized Facts and Stylized Illusions: Inflation and Productivity Revisited," Canadian Journal of Economics, Canadian Economics Association, vol. 29(1), pages 152-62, February.
  19. Clark, Peter K, 1982. "Inflation and the Productivity Decline," American Economic Review, American Economic Association, vol. 72(2), pages 149-54, May.
  20. Efthymios Tsionas, 2003. "Inflation and Productivity: Empirical Evidence from Europe," Review of International Economics, Wiley Blackwell, vol. 11(1), pages 114-129, February.
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