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Productivity and Inflation

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Author Info

  • 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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File URL: http://www.rba.gov.au/publications/rdp/2003/pdf/rdp2003-10.pdf
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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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Related research

Keywords: inflation; productivity; industrial structure;

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