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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.

Suggested Citation

  • Raphael Espinoza & Hyginus Leon & Ananthakrishnan Prasad, 2012. "When Should We Worry about Inflation?," World Bank Economic Review, World Bank Group, 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. Garcés Díaz Daniel, 2016. "Changes in Inflation Predictability in Major Latin American Countries," Working Papers 2016-20, Banco de México.
    2. 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.
    3. repec:mes:postke:v:40:y:2017:i:4:p:512-539 is not listed on IDEAS

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