Inflation and Economic Growth: A Cross-Country Non-linear Analysis
This paper presents new non-linear regression estimates of the relationship between inflation and economic growth for 80 countries over the period 1961 – 2000. We perform tests using the full sample of countries as well as sub-samples consisting of OECD countries, middle-income countries, and low-income countries. We also consider the full sample of countries within the four separate decades between 1961 – 2000. Considering our full data set we consistently find that higher inflation is associated with moderate gains in GDP growth up to a roughly 15 – 18 percent inflation threshold. However, the findings diverge when we divide our full data set according to income levels. With the OECD countries, no clear pattern emerges at all with either the inflation coefficient or our estimated turning point. With the middle income countries, we return to a consistently positive pattern of inflation coefficients, though none are statistically significant. The turning points range within a narrow band in this sample, between 14 – 16 percent. With the low income countries, we obtain positive and higher coefficient values on the inflation coefficient than with the middle-income countries. With the groupings by decade, the results indicate that inflation and growth will be more highly correlated to the degree that macroeconomic policy is focused on demand management as a stimulus to growth. We consider the implications of these findings for the conduct of monetary policy. One is that there is no justification for inflation-targeting policies as they are currently being practiced throughout the middle- and low-income countries, that is, to maintain inflation with a 3 – 5 percent band.
|Date of creation:||2005|
|Date of revision:|
|Contact details of provider:|| Postal: 418 N Pleasant St, Amherst MA 01002|
Phone: (413) 545-6355
Fax: (413) 545-2921
Web page: http://www.peri.umass.edu/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael Bruno & William Easterly, 1995.
"Inflation Crises and Long-Run Growth,"
NBER Working Papers
5209, National Bureau of Economic Research, Inc.
- Richard C.K. Burdekin & Arthur T. Denzau & Manfred W. Keil & Thitithep Sitthiyot & Thomas D. Willett, .
"When Does Inflation Hurt Economic Growth? Different Nonlinearities for Different Economies,"
Claremont Colleges Working Papers
2000-22, Claremont Colleges.
- Burdekin, Richard C.K. & Denzau, Arthur T. & Keil, Manfred W. & Sitthiyot, Thitithep & Willett, Thomas D., 2004. "When does inflation hurt economic growth? Different nonlinearities for different economies," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 519-532, September.
- Abdelhak S Senhadji & Mohsin S. Khan, 2000.
"Threshold Effects in the Relationship Between Inflation and Growth,"
IMF Working Papers
00/110, International Monetary Fund.
- By Mohsin S. Khan & Abdelhak S. Senhadji, 2001. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 1.
- Robert J. Flanagan, 1999. "Macroeconomic Performance and Collective Bargaining: An International Perspective," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1150-1175, September.
- Dornbusch, Rudiger & Fischer, Stanley, 1993.
World Bank Economic Review,
World Bank Group, vol. 7(1), pages 1-44, January.
- Frederic S. Mishkin & Adam S. Posen, 1997.
"Inflation targeting: lessons from four countries,"
Economic Policy Review,
Federal Reserve Bank of New York, issue Aug, pages 9-110.
- Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, March.
- Lars Calmfors, 1993. "Centralisation of Wage Bargaining and Macroeconomic Performance: A Survey," OECD Economics Department Working Papers 131, OECD Publishing.
- Atish Ghosh & Steven Phillips, 1998. "Warning: Inflation May Be Harmful to Your Growth," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 672-710, December.
When requesting a correction, please mention this item's handle: RePEc:uma:periwp:wp109. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Judy Fogg)
If references are entirely missing, you can add them using this form.