What is the Optimal Rate of Inflation for Long-Run Growth? A Cross-Country Analysis

THEORIES AND EFFECTS OF ECONOMIC GROWTH, Richard L. Bertrand ed., NY: Nova Science Publishers, 2011

23 Pages Posted: 11 Sep 2007 Last revised: 19 Dec 2011

See all articles by Hakan Yilmazkuday

Hakan Yilmazkuday

Florida International University (FIU) - Department of Economics

Date Written: June 1, 2008

Abstract

Although the relationship between financial development and growth is almost obvious, the effect of inflation on the finance-growth nexus is still a subject of debate. In particular, what is the optimal rate of inflation for long-run growth? To answer this question, I analyze the relation between finance, inflation and growth by using a semiparametric graphical approach. I find that the optimal level of inflation that leads to higher long-run growth rates is around 10 percent. I also show that the positive effects of low inflation on growth are more apparent when there are high levels of financial depth. Finally, when both the levels of inflation and financial depth are low, the growth rate of the economy is volatile.

Keywords: Financial development, Economic growth, Inflation, Cross-country analysis

JEL Classification: E31, E44, F36

Suggested Citation

Yilmazkuday, Hakan, What is the Optimal Rate of Inflation for Long-Run Growth? A Cross-Country Analysis (June 1, 2008). THEORIES AND EFFECTS OF ECONOMIC GROWTH, Richard L. Bertrand ed., NY: Nova Science Publishers, 2011, Available at SSRN: https://ssrn.com/abstract=1012050

Hakan Yilmazkuday (Contact Author)

Florida International University (FIU) - Department of Economics ( email )

11200 SW 8th Street
Miami, FL 33199
United States

HOME PAGE: http://faculty.fiu.edu/~hyilmazk/

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