Assessing the Impacts and Policy Alternatives
Edited by Gerald A. Epstein and A. Erinc Yeldan
Chapter 6: Inflation and Economic Growth: A Cross-Country Non-Linear Analysis
6. Inflation and economic growth: a cross-country non-linear analysis Robert Pollin and Andong Zhu1 INTRODUCTION 6.1 This chapter presents new cross-country evidence between 1961 and 2000 on the relationship between inflation and economic growth. Despite the central importance of this inflation-growth relationship for macroeconomic theory and policy, there is nothing close to a professional consensus as to what the empirical evidence tells us about this relationship. The results we present here have direct relevance to the debate on inflation targeting as an appropriate framework for conducting monetary policy. Over the past decade governments throughout the world have embraced inflation targeting as a dominant policy framework. For the most part, this specifically means that they have set a low band of acceptable inflation rates as a primary target in the conduct of economic policy. This band is usually between a 3–5 percent annual inflation rate. They have then maintained sufficiently high short-term interest rates as the intermediate policy instrument for preventing inflation from exceeding that target band. Higher interest rates are aimed, in turn, at reducing economic growth. Slower economic growth should then dampen inflationary pressures. At least in the short run, the costs in terms of slower growth of containing inflation within this 3–5 percent band are evident. But proponents of inflation targeting hold that, over a longer term framework, maintaining low inflation will itself yield benefits for growth that exceed these short-term costs.2 Some limitations of inflation targeting have been widely recognized by mainstream economists and even...
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