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Inflation and Economic Growth

36 Pages Posted: 13 Sep 2000 Last revised: 24 Sep 2010

Robert J. Barro

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 1995

Abstract

Data 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.

Suggested Citation

Barro, Robert J., Inflation and Economic Growth (October 1995). NBER Working Paper No. w5326. Available at SSRN: https://ssrn.com/abstract=225390

Robert J. Barro (Contact Author)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Harvard University - Department of Economics ( email )

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Cambridge, MA 02138
United States
617-495-3203 (Phone)

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