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The Effect of Inflation on Growth: Evidence from a Panel of Transition Countries

The paper examines the effect of inflation on growth in transition countries. It presents panel data evidence for 13 transition countries over the 1990-2003 period; it uses a fixed effects, full-information maximum likelihood, panel approach to account for possible bias from correlations among the unobserved effects and the observed country heterogeniety. The results find a strong, robust, negative effect of inflation on growth, and one that declines in magnitude as the inflation rate increases. These results include a role for a normalized money demand, by itself and as part of a nonlinearity in the inflation-growth effect. And these results derive from both a baseline single equation model and one that is then expanded into a three equation simultaneous system. This allows for possible simultaneity bias in the baseline model.

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File URL: http://patrickminford.net/wp/E2008_25.pdf
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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2008/25.

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Length: 20 pages
Date of creation: Oct 2008
Date of revision:
Publication status: Published in Economics of Transition , Volume 18, Issue 4 (October), pages 697-714.
Handle: RePEc:cdf:wpaper:2008/25
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Web page: http://business.cardiff.ac.uk/research/academic-sections/economics/working-papers

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  1. Max Gillman & Mark N. Harris & László Mátyás, 2004. "Inflation and growth: Explaining a negative effect," Empirical Economics, Springer, vol. 29(1), pages 149-167, January.
  2. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
  3. Raghuram G. Rajan & Luigi Zingales, 2001. "The Great Reversals: The Politics of Financial Development in the 20th Century," CRSP working papers 526, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  4. P. J. Dawson, 2003. "Financial development and growth in economies in transition," Applied Economics Letters, Taylor & Francis Journals, vol. 10(13), pages 833-836.
  5. Szilárd Benk & Max Gillman & Michal Kejak, 2007. "Money Velocity in an Endogenous Growth Business Cycle with Credit Shocks," MNB Working Papers 2007/5, Magyar Nemzeti Bank (the central bank of Hungary).
  6. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2004. "The Effect of Financial Development on Convergence: Theory and Evidence," NBER Working Papers 10358, National Bureau of Economic Research, Inc.
  7. Atish R. Ghosh & Steven Phillips, 1998. "Inflation, Disinflation, and Growth," IMF Working Papers 98/68, International Monetary Fund.
  8. William Greene, 2004. "The behaviour of the maximum likelihood estimator of limited dependent variable models in the presence of fixed effects," Econometrics Journal, Royal Economic Society, vol. 7(1), pages 98-119, 06.
  9. Max Gillman & Michal Kejak, 2004. "Inflation and Balanced-Path Growth with Alternative Payment Mechanisms," IEHAS Discussion Papers 0402, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  10. Dario Cziráky & Max Gillman, 2006. "Money Demand in an EU Accession Country: A VECM Study of Croatia," Bulletin of Economic Research, Wiley Blackwell, vol. 58(2), pages 105-127, 04.
  11. Crowder, William J, 1998. "The Long-Run Link between Money Growth and Inflation," Economic Inquiry, Western Economic Association International, vol. 36(2), pages 229-43, April.
  12. Max Gillman & Anton Nakov, 2004. "Granger causality of the inflation-growth mirror in accession countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 12(4), pages 653-681, December.
  13. Nelson C. Mark & Donggyu Sul, 2002. "Cointegration Vector Estimation by Panel DOLS and Long-Run Money Demand," NBER Technical Working Papers 0287, National Bureau of Economic Research, Inc.
  14. Max Gillman & Michal Kejak, 2005. "Contrasting Models of the Effect of Inflation on Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 19(1), pages 113-136, 02.
  15. Stilianos Fountas & Menelaos Karanasos & Jinki Kim, 2006. "Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(3), pages 319-343, 06.
  16. Max Gillman & Mark N. Harris, 2004. "Inflation, Financial Development and Endogenous Growth," Monash Econometrics and Business Statistics Working Papers 24/04, Monash University, Department of Econometrics and Business Statistics.
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