Sunday, January 19, 2014

Inflation and growth, part 2

Last month I had a post about the relationship between inflation and growth.  I said that it looked like there was no relationship until inflation reached about 10%.  I did a little more analysis and refined that conclusion a bit.  Here are the estimated effects of an additional 1% of inflation:

negative to +3               .278       .234
+3 to +9                      -.047     -.060
+9 and up                    -.235     -.280

The estimates in the first column are from a standard regression and those in the second column include fixed effects for countries (ie they are based solely on variation within countries).  The two sets of estimates are remarkably similar.   The estimated effects are also large enough to be important:  going from 1% to 3% inflation is estimated to go with 0.5% higher growth (e. g., 2.5% vs. 2%).

I suspect the main reason for the difference from the conclusions of some other studies is that most of them looked at a large number of countries, while I just looked at 16 high-income countries.  Even the studies that distinguish between high-income and developing countries usually define high income pretty broadly, like all OECD countries.

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