Inflation Crises and Long-Run Growth
Journal of Monetary Economics, Vol. 41, No. 1, February 1998
Posted: 23 Sep 1998
The negative growth-inflation association in the existing literature is usually interpreted as a long-run relationship. But the existing literature on inflation and growth has a puzzling anomaly: there is little evidence of a relationship with low-frequency (30-year) data, but inflation and growth are found to be correlated using higher-frequency data (decades or annual data). The inflation-growth correlation using decade or annual data only confirms a relationship in the 70s and 80s; evidence for earlier periods is lacking. We propose that these anomalies can be explained by viewing high inflation crises as discrete events that temporarily but sharply lower growth, followed by a strong recovery once the high inflation crisis is over. Empirical evidence strongly supports this view. There were few high inflation crises (which we define as inflation above 40 percent for 2 years or more) in the 60s, hence the lack of results in the 60s. The strong growth recovery after the end of high inflation crises help explain the lack of an inflation-growth relationship using low-frequency data which averages out the output collapse and recovery. We find that the occurence of high inflation crises explains all of the existing growth-inflation relationships in the literature, as there is no robust evidence that inflation below 40 percent annual lowers growth.
Note: This is a description of the paper and not the actual abstract. Sadly, Michael Bruno died in December 1996 while affiliated at the Hebrew University.
JEL Classification: O40
Suggested Citation: Suggested Citation