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Nonlinear Effects of Inflation on Economic Growth

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  • Michael Sarel

    (International Monetary Fund)

Abstract

This paper examines the possibility of nonlinear effects of inflation on economic growth. It finds evidence of a significant structural break in the function that relates economic growth to inflation. The break is estimated to occur when the inflation rate is 8 percent. Below that rate, inflation does not have any effect on growth, or it may even have a slightly positive effect. When the inflation rate is above 8 percent, however, the estimated effect of inflation on growth rates is significant, robust, and extremely powerful. The paper also demonstrates that when the existence of the structural break is ignored, the estimated effect of inflation on growth is biased by a factor of three.

Suggested Citation

  • Michael Sarel, 1996. "Nonlinear Effects of Inflation on Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 199-215, March.
  • Handle: RePEc:pal:imfstp:v:43:y:1996:i:1:p:199-215
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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