Inflation and economic growth: a cross-country nonlinear analysis

Abstract

This paper presents new nonlinear regression estimates of the relationship between inflation and economic growth for 80 countries over the 1961- 2000 period, using middle-income and low-income countries. We also consider the four separate decades between 1961 and 2000. The paper consistently finds that higher inflation is associated with moderate gains in gross domestic product growth up to a roughly 15-18 percent inflation threshold. However, the findings diverge when we divide our full data set according to income levels. With the groupings by decade, the results indicate that inflation and growth will be more highly correlated to the degree that macroeconomic policy is focused on demand management as a stimulus to growth. We consider the implications of these findings for the conduct of monetary policy. One conclusion is that there is no justification for inflation-targeting policies as they are currently being practiced throughout the middle- and low-income countries, that is, to maintain inflation with a 3-5 percent band.