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When Should We Worry about Inflation?

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  • Raphael Espinoza
  • Hyginus Leon
  • Ananthakrishnan Prasad

Abstract

At what level should inflation be a concern? From a growth perspective, high and rising levels of inflation as in 2006–2008 raise concerns that inflation, if uncontained, could undermine growth. On the other hand, higher levels of inflation could create more space for using monetary policy to reduce nominal and real interest rates during financial crises. A nonlinear growth regression for 165 countries over 1960–2007 shows that for developing countries, inflation above 10 percent quickly hurts growth. For advanced economies, there is no specific threshold: in the medium term, higher inflation hurts growth for any initial level of inflation, suggesting that there is a real cost to maintaining higher inflation as a buffer. Copyright 2012, Oxford University Press.

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  • Raphael Espinoza & Hyginus Leon & Ananthakrishnan Prasad, 2012. "When Should We Worry about Inflation?," The World Bank Economic Review, World Bank, vol. 26(1), pages 100-127.
    • Handle: RePEc:oup:wbecrv:v:26:y:2012:i:1:p:100-127
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    File URL: http://hdl.handle.net/10.1093/wber/lhr043
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    Cited by:

    1. Nell, Kevin, 2023. "Inflation and growth in developing economies: A tribute to Professor Thirlwall," MPRA Paper 118757, University Library of Munich, Germany, revised 01 Sep 2023.
    2. González, Andrés & Teräsvirta, Timo & van Dijk, Dick & Yang, Yukai, 2005. "Panel Smooth Transition Regression Models," SSE/EFI Working Paper Series in Economics and Finance 604, Stockholm School of Economics, revised 11 Oct 2017.
    3. Ha,Jongrim & Ivanova,Anna & Ohnsorge,Franziska Lieselotte & Unsal Portillo Ocando,Derya Filiz, 2019. "Inflation : Concepts, Evolution, and Correlates," Policy Research Working Paper Series 8738, The World Bank.
    4. Pierre Monnin & Alexander Barkawi, 2015. "Monetary Policy and Sustainability. The Case of Bangladesh," Discussion Notes 1501, Council on Economic Policies.
    5. Garcés Díaz Daniel, 2016. "Changes in Inflation Predictability in Major Latin American Countries," Working Papers 2016-20, Banco de México.
    6. Mevlut Tatliyer, 2017. "Inflation targeting and the need for a new central banking framework," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 40(4), pages 512-539, October.
    7. Funke, Michael & Li, Xiang & Zhong, Doudou, 2023. "Household indebtedness, financial frictions and the transmission of monetary policy to consumption: Evidence from China," Emerging Markets Review, Elsevier, vol. 55(C).
    8. Jadidzadeh, Ali, 2022. "An Application of Smooth Transition Regression Models to Homeless Research," MPRA Paper 116356, University Library of Munich, Germany.
    9. Tolga Omay & Reneé Eyden & Rangan Gupta, 2018. "Inflation–growth nexus: evidence from a pooled CCE multiple-regime panel smooth transition model," Empirical Economics, Springer, vol. 54(3), pages 913-944, May.
    10. Raphael Espinoza, 2012. "Factor Accumulation and the Determinants of TFP in the GCC," OxCarre Working Papers 094, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.

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