Inflation and Real Growth: Some Empirical Results: Note

Abstract

What is the relationship between the average rate of inflation and the variability of real economic growth? Recent studies by Gordon [3], Okun [7], Logue and Willett [6], Klein [5], and Jaffee and Kleiman [4] have attempted to f1ll some of the gaps in our knowledge of inflation's effect on the economy; these studies have generally demonstrated the positive empirical relationship between the rate of inflation and its variability or unpredictability. Such heightened uncertainty may produce greater variability of real growth which, in turn, undoubtedly increases welfare costs. Using annual data for twenty-four countries, we Elnd a positive relationship between the mean inflation rate and the variability of real economic growth. This finding strengthens the commonly held belief that inflation is undesirable on welfare grounds.