Inflation and Economic GrowthData for around 100 countries from 1960 to 1990 are used to assess the effects of inflation on economic performance. If a number of country characteristics are held constant, then regression results indicate that the impact effects from an increase in average inflation by 10 percentage points per year are a reduction of the growth rate of real per capita GDP by 0.2-0.3 percentage points per year and a decrease in the ratio of investment to GDP by 0.4-0.6 percentage points. Since the statistical procedures use plausible instruments for inflation, there is some reason to believe that these relations reflect causal influences from inflation to growth and investment. However, statistically significant results emerge only when high- inflation experiences are included in the sample. Although the adverse influence of inflation on growth looks small, the long-term effects on standards of living are substantial. For example, a shift in monetary policy that raises the long-term average inflation rate by 10 percentage points per year is estimated to lower the level of real GDP after 30 years by 4-7%, more than enough to justify a strong interest in price stability. |
Common terms and phrases
0.2-0.3 percentage points average inflation rate Barro black-market premium Bureau of Economic central bank independence CFA Franc CFA Franc Zone column contemporaneous inflation Cukierman 1992 deviation of inflation earlier values Economic Growth effect of inflation estimated coefficient estimated effect exogenous explanatory variables French Franc gross domestic product growth and inflation Guinea-Bissau high-inflation observations human capital INFLATION AND ECONOMIC inflation on growth inflation rate growth instrumental variables instruments for inflation investment ratio James Heckman John Shea lagged inflation Latin America dummy legal provisions list of NBER log GDP Macroeconomic measured median Monetary Economics monetary policy Mozambique NBER NBER Working Papers non-colonies Nouriel Roubini number of observations panel periods power for inflation prior colonial status rate growth rate rate of inflation rate of real ratio of investment real per capita regression relation between growth rule of law sample standard deviation substantial explanatory power terms-of-trade Uganda Uruguay variability of inflation Zaire Zambia