Inflation Crises and Long-Run Growth

49 Pages Posted: 13 Sep 2000 Last revised: 30 Sep 2010

See all articles by William Easterly

William Easterly

New York University - Department of Economics

Michael Bruno

Hebrew University (Deceased)

Multiple version iconThere are 3 versions of this paper

Date Written: August 1995

Abstract

Recent literature suggests that long-run averages of growth and inflation are only weakly correlated and such correlation is not robust to exclusion of extreme inflation observations; inclusion of time series panel data has improved matters, but an aggregate parametric approach remains inconclusive. We propose a nonparametric definition of high inflation crises as periods when inflation is above 40 percent annually. Excluding countries with high inflation crises, we find no evidence of any consistent relationship between growth and inflation at any frequency. However, we find that growth falls sharply during discrete high inflation crises, then recovers surprisingly strongly after inflation falls. The fall in growth during crisis and recovery of growth after crisis tend to average out to close to zero (even slightly above zero), hence the lack of a robust cross-section correlation. Our findings could be consistent either with trend stationarity of output, in which inflation crises are purely cyclical phenomena, or with models in which crises have a favorable long-run purgative effect. Our findings do not support the view that reduction of high inflation carries heavy short-to-medium run output costs.

Suggested Citation

Easterly, William and Bruno, Michael, Inflation Crises and Long-Run Growth (August 1995). NBER Working Paper No. w5209. Available at SSRN: https://ssrn.com/abstract=225273

William Easterly (Contact Author)

New York University - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

Michael Bruno

Hebrew University (Deceased)

Register to save articles to
your library

Register

Paper statistics

Downloads
49
Abstract Views
1,326
PlumX Metrics