Inflation and growth: Explaining a negative effect

Abstract

Kormendi and McGuire (1985) document a negative effect of inflation on economic growth for a cross-section of 47 countries during the period 1950-1977. Recent panel evidence such as Barro’s (2001) strengthens the support for such a negative effect. In qualification, Khan and Senhadji (2001), Ghosh and Phillips (1998), and Judson and Orphanides (1996) all find a significant negative inflation-growth effect above a certain “threshold” value of the inflation rate, and no significant effect below the threshold value, without using instrumental variables and with differences found between less and more developed country samples. Further the above threshold negative effect that they find is significantly non-linear whereby the marginal effect is stronger at lower inflation rates than at higher ones; see also Fischer (1993).