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The inflation-productivity trade-off revisited

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  • George C. Bitros

    (Athens University of Economics & Business)

  • Epameinondas E. Panas

    (Athens University of Economics & Business)

Abstract

Our aim in this paper is threefold. First, to test the robustness of the relation between total factor productivity growth and inflation to the specification of the estimating model; second, to test the stability of their relationship in the short run and in the long run, and third, to investigate the direction of causality between these two variables. To accomplish the first objective, we esti-mate a generalized Box-Box cost function using data from the two-digit Standard Industrial Clas- sification of manufacturing industries in Greece during the period 1964- 1980. The results show that: a) the acceleration of inflation from 1964- 1972 to 1973-1980 reduced total factor productiv-ity growth in a way that was both statistically significant and sizeable, and b) even when the ef-fect of inflation is separated from the effects of technical change and economies of scale, the choice of functional form is most crucial. With respect to the second objective, somewhat to our surprise, we find that the inflation-productivity trade-off prevails even in the long run. And, fi-nally, regarding the third objective, it emerges that in the great majority of two-digit manufactur-ing industries the causality runs from inflation to productivity. On these grounds we conclude that for a precise estimation of the relationship under consideration it is imperative to sort out the three effects involved, do so by adopting the most general flexible functional form for the cost function, and run the appropriate stability and causality tests.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0512012.

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Length: 25 pages
Date of creation: 16 Dec 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0512012

Note: Type of Document - pdf; pages: 25
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Web page: http://128.118.178.162

Related research

Keywords: inflation; productivity; scale economies; technical change; generalized Box-Cox cost function; stability; causality;

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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. Baltagi, Badi H & Griffin, James M, 1988. "A General Index of Technical Change," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 20-41, February.
  3. Clark, Todd E, 1997. "Cross-country Evidence on Long-Run Growth and Inflation," Economic Inquiry, Western Economic Association International, vol. 35(1), pages 70-81, January.
  4. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
  5. 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.
  6. Appelbaum, Elie, 1979. "On the Choice of Functional Forms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 449-58, June.
  7. 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.
  8. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1975. "Transcendental Logarithmic Utility Functions," American Economic Review, American Economic Association, vol. 65(3), pages 367-83, June.
  9. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
  10. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 481-507, May-June.
  11. Berndt, Ernst R & Khaled, Mohammed S, 1979. "Parametric Productivity Measurement and Choice among Flexible Functional Forms," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1220-45, December.
  12. Hanoch, Giora, 1975. "The Elasticity of Scale and the Shape of Average Costs," American Economic Review, American Economic Association, vol. 65(3), pages 492-97, June.
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