Inflation and Growth: Some Theory and Evidence

Abstract

The paper presents a monetary model of endogenous growth and specifies an econometric model consistent with this model. The estimation is based on OECD and APEC panel data, from 1961-1997. It includes fixed country and time heterogeneity and shows a strong negative effect of inflation on growth for the OECD countries, one that decreases marginally as the inflation rate rises. The APEC results show some evidence of the inflation rate effect, with a significant negative impact at higher inflation ranges. Segmenting the sample by country, according to average inflation rates, results in a stronger effect of inflation in general than without such a grouping. It also shows the non- linearity of a stronger marginal negative effect at lower inflation rates both for OECD and for APEC.

JEL Classification: O42, C23, C51, E13