DP1503 Does Inflation Matter for Growth?
|Author(s):||Thorvaldur Gylfason, Tryggvi Thor Herbertsson|
|Publication Date:||December 1996|
|Keyword(s):||Economic Growth, Inflation|
|JEL(s):||C5, E3, O4|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=1503|
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.