Nonlinear Effects of Inflation on Economic Growth

26 Pages Posted: 15 Feb 2006

Date Written: May 1995

Abstract

This paper examines the possibility of nonlinear effects of inflation on economic growth. It finds evidence of a significant structural break in the function that relates economic growth to inflation. The break is estimated to occur when the inflation rate is 8 percent. Below that rate, inflation does not have any effect on growth, or it may even have a slightly positive effect. When the inflation rate is above 8 percent, however, the estimated effect of inflation on growth rates is significant, robust and extremely powerful. The paper also demonstrates that when the existence of the structural break is ignored, the estimated effect of inflation on growth is biased by a factor of three.

JEL Classification: E31, O40

Suggested Citation

Sarel, Michael, Nonlinear Effects of Inflation on Economic Growth (May 1995). IMF Working Paper No. 95/56, Available at SSRN: https://ssrn.com/abstract=883204

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