Does Inflation Matter for Growth?

Posted: 9 Dec 1996

See all articles by Tryggvi Thor Herbertsson

Tryggvi Thor Herbertsson

University of Reykjavik

Thorvaldur Gylfason

University of Iceland - Faculty of Economics and Business Administration; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: Undated

Abstract

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

Herbertsson, Tryggvi Thor and Gylfason, Thorvaldur, Does Inflation Matter for Growth? (Undated). Available at SSRN: https://ssrn.com/abstract=3577

Tryggvi Thor Herbertsson (Contact Author)

University of Reykjavik ( email )

Reykjavik
Iceland
+354 8613162 (Phone)

HOME PAGE: http://www.ru.is

Thorvaldur Gylfason

University of Iceland - Faculty of Economics and Business Administration ( email )

IS-101 Reykjavik
Iceland
+354 525 4533/00 (Phone)
+354 552 6806 (Fax)

HOME PAGE: http://www.hi.is/~gylfason/inenglish.htm)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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