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Evidence on the functional form of inflation and output growth variability relationship in European economies

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  • Muhammad Khan

Abstract

A bulk of literature reports positive and significant link between inflation and relative price variability (RPV). Monetarists hold that this positive connection between the two variables exerts huge welfare consequences due to the fact that a high RPV increases output dispersion among firms. Some recent studies, however, show that the inflation–RPV nexus is neither linear nor stable over-time and thereby the inflation effects on output dispersion, appearing through this channel, should be minor. To address these ambiguities, this study directly tests the effect of inflation on output growth variability using a large panel of 25 developed and emerging European economies. Moreover, we also probe into the functional form of this nexus by employing a panel smooth transition regression model. Our results support a nonlinear relationship between the two variables and advance certain inflation thresholds below which inflation appeases the sectoral output growth variability and above this level it aggravates the later.

Suggested Citation

  • Muhammad Khan, 2016. "Evidence on the functional form of inflation and output growth variability relationship in European economies," International Economics, CEPII research center, issue 146, pages 1-11.
    • Handle: RePEc:cii:cepiie:2016-q2-146-1
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    Cited by:

    1. O. Evans, 2019. "Money, Inflation and Output in Nigeria and South Africa: Could Friedman and Schwartz Be Right?," Journal of African Business, Taylor & Francis Journals, vol. 20(3), pages 392-406, July.
    2. Sèna Kimm Gnangnon, 2020. "Export product diversification and tax performance quality in developing countries," International Economics and Economic Policy, Springer, vol. 17(4), pages 849-876, October.

    More about this item

    Keywords

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    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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