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Does inflation matter for growth?

  • Gylfason, Thorvaldur
  • Herbertsson, Tryggvi Thor

Some channels through which increased inflation tends to reduce economic growth, and vice versa, are studied within a simple model incorporating money into an optimal growth framework with constant returns to capital. The model includes the potential impact of inflation on: (a) saving through real interest rates (or uncertainty); (b) the income velocity of money; (c) the government budget deficit through the inflation tax and tax erosion; and (d) efficiency in production through the wedge between the returns to real and financial capital. The effect of inflation on growth is estimated using the random-effects panel model applied to two sets of unbalanced panel data side-by-side, from the Penn World Tables and from the World Bank, covering 170 countries from 1960 to 1993. The cross-country links between inflation and growth are economically and statistically significant and robust.

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Article provided by Elsevier in its journal Japan and the World Economy.

Volume (Year): 13 (2001)
Issue (Month): 4 (December)
Pages: 405-428

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Handle: RePEc:eee:japwor:v:13:y:2001:i:4:p:405-428
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505557

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