Does Inflation Matter for Growth?
Posted: 9 Dec 1996
Date Written: Undated
Some channels through which increased inflation tends to reduce economic growth, and vice versa, are studied within a simple model incorporating money into an optimal growth framework with constant returns to capital. The model includes the potential impact of inflation on (a) saving through real interest rates (or uncertainty), (b) the income velocity of money, (c) the government budget deficit through the inflation tax and tax erosion, and (d) efficiency in production through the wedge between the returns to real and financial capital.The effect of inflation on growth is estimated using the random-effects panel model applied to two sets of unbalanced panel data side by side, from the Penn World Tables and from the World Bank, covering 170 countries from 1960 to 1993. The cross-country links between inflation and growth are economically and statistically significant and robust.
JEL Classification: E31
Suggested Citation: Suggested Citation