Another look at the inflation-productivity trade-off
AbstractOur aim in this paper is to test the robustness of the relation between total factor productivity growth and inflation to the specification of the model adopted for its identification. In doing so we estimate a generalized Box-Box cost function using data from the two-digit Standard Industrial Classification of manufacturing industries in Greece during the period 1964-1980. The results confirm that the acceleration of inflation from 1964-1972 to 1973-1980 reduced total factor productivity growth in a way that was both statistically significant and sizeable. In addition, they reveal that, even when the effect of inflation is separated from the effects of technical change and economies of scale, the choice of functional form is most crucial. The reason being that cost functions such as the translog, the generalized Leontief, and the generalized square root quadratic are not general enough to account for the sensitivity of estimates to model specification. On these grounds then we conclude that, for a precise estimation of the adverse impact of inflation on total factor productivity growth, it is imperative both to sort out the three effects involved and do so by adopting the most general flexible functional form available for the cost function.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0506001.
Length: 19 pages
Date of creation: 02 Jun 2005
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inflation; total factor productivity; generalized Box-Cox cost function; economic growth;
Other versions of this item:
- Bitros, G.C. & Panas, E.J., 1999. "Another Look at the Inflation-Productivity Trade-Off," DEOS Working Papers 114, Athens University of Economics and Business.
- Bitros, G.C. & Panas, E.J., 1999. "Another Look at the Inflation-Productivity Trade-Off," Athens University of Economics and Business 114, Athens University of Economics and Business, Department of International and European Economic Studies.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-06-14 (All new papers)
- NEP-DEV-2005-06-14 (Development)
- NEP-MAC-2005-06-14 (Macroeconomics)
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