Inflation and economic growth: a cross-country nonlinear analysis

Abstract

This paper presents new non-linear regression estimates of the relationship between inflation and economic growth for 80 countries over the period 1961 -2000. We perform tests using the full sample of countries as well as sub-samples consisting of OECD countries, middle-income countries, and low-income countries. We also consider the full sample of countries within the four separate decades between 1961 -2000. Considering our full data set we consistently find that higher inflation is associated with moderate gains in GDP 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 OECD countries, no clear pattern emerges at all with either the inflation coefficient or our estimated turning point. With the middle income countries, we return to a consistently positive pattern of inflation coefficients, though none are statistically significant. The turning points range within a narrow band in this sample, between 14 -16 percent. With the low income countries, we obtain positive and higher coefficient values on the inflation coefficient than with the middle-income countries. 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 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.

Monetary freedom and economic growth in New European Union Member States

“…Distortions in the efficient decision-making process arise from the fact that relative prices do not function properly under inflationary pressures and act as a signal (Pollin & Zhu, 2006). Bruno and Easterly (1998) suggest that during inflationary periods, capital accumulation slows down and only partially recovers after the crisis passes.…”

“…In this sense, the impact of inflation depends on its level and is characterized by non-linearity (Ahmed & Mortaza, 2005;Mubarik, 2005;Pollin & Zhu, 2006;Sarel, 1995;Sweidan, 2004). Even the degree of development could play a role, meaning that in developing countries it could actually stimulate the growth (Folz, 1970).…”

Nicaragua: inflación de umbral, crecimiento económico y la nueva política monetaria después de la crisis internacional

“…David et al (2005) estiman un umbral del 19,16% para la muestra completa y los países no-industrializados, y del 12,51% para la muestra de países industrializados. • Pollin and Zhu (2006) analizan 80 países entre 1961 y 2000; encuentran un umbral del 14-16% para países de ingreso medio, y del 15-23% para países de ingresos bajos. • Vaona and Schiavo (2007) estudian 167 países entre 1960 y 1999, empleando métodos no-paramétricos y semiparamétricos, y encuentran un umbral del 12% debajo del cual la inflación no sería perjudicial para el crecimiento, aunque no obtienen resultados claros para países en desarrollo, un resultado que Vaona and Schiavo (2007) piensan que se debe a las diferentes experiencias de los países agrupados como en desarrollo.…”

Inflation Targeting, Employment Creation and Economic Development: Assessing the Impacts and Policy Alternatives

“…Most disturbing is the common belief that what is good for the industrialized/developed market economies should simply be replicated by the developing countries as well. That, this may not be the case is forcefully argued in Pollin and Zhu (2006). Based on their non-linear regression estimates of the relationship between inflation and economic growth for 80 countries over the period 1961 -2000, Pollin and Zhu report that higher inflation is associated with moderate gains in GDP growth up to a roughly 15 -18 percent inflation threshold.…”