Inflation Anchoring, Real Borrowing Costs, and Growth: Evidence from Sectoral Data

43 Pages Posted: 18 Jun 2019

See all articles by Sangyup Choi

Sangyup Choi

Yonsei University

Davide Furceri

International Monetary Fund (IMF)

Prakash Loungani

International Monetary Fund (IMF)

Date Written: June 9, 2019

Abstract

Central bankers often assert that anchoring of inflation expectations and reducing inflation uncertainty are good for economic outcomes. We test this claim and search for a relevant channel using panel data on sectoral growth for 22 manufacturing industries from 36 advanced and emerging market economies over the period 1990-2014. Our difference-in-difference strategy is based on the theoretical prediction that inflation uncertainty has larger effects in industries that are more credit constrained by increasing effective real borrowing costs. The results show that industries characterized by high external financial dependence, low asset tangibility, and high R&D intensity tend to grow faster in countries with well-anchored inflation expectations. The results are robust to controlling for the interaction between these characteristics and a broad set of macroeconomic variables over the sample period, including the level of inflation and output volatility. The results are also robust to IV techniques, using indicators of monetary policy transparency and independence as instruments.

Keywords: industry-level growth; inflation anchoring; inflation uncertainty; long-run growth; credit constraints

JEL Classification: E52, E63, O11, O43, O47

Suggested Citation

Choi, Sangyup and Furceri, Davide and Loungani, Prakash, Inflation Anchoring, Real Borrowing Costs, and Growth: Evidence from Sectoral Data (June 9, 2019). Available at SSRN: https://ssrn.com/abstract=3401446 or http://dx.doi.org/10.2139/ssrn.3401446

Sangyup Choi (Contact Author)

Yonsei University ( email )

Seoul
Korea, Republic of (South Korea)

Davide Furceri

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Prakash Loungani

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7043 (Phone)
202-623-4740 (Fax)

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