Investingating the Growth-Inflation Nexus in Africa

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Recommended: merit and dismerit of inflation targeting

Every macroeconomic policy aims at keeping the output growth rate at a high and sustainable level, and the inflation rate at a stable, desirable level. Price level stability is crucial in determining the output growth rate. This led central banks in a number of countries to implement inflation targeting regimes. Such decisions give rise to the important question: what is the most suitable inflation target?

The literature regarding the nature of the relation between inflation and growth goes back to the 1960s. This literature can be divided into four groups. The first group assumes that inflation has no influence on growth ((Dorrance 1963), (Sidrauski 1967), (Cameron, Hum and Simpson 1996)). The second group argues that the relationship between inflation and growth is positive ((Tobin 1965), (Shi 1999)). The third group claims that inflation has a negative impact on growth (Friedman 1956), (Stockman 1981), (Gylfason 1991), (Gylfason, Output Gains from Economic Stabilization 1998), (De Gregorio 1992), (Barro 1996), (Andres and Hernando 1997). The fourth group assumes that the liaison between inflation and output growth is nonlinear, suggesting that inflation has a positive or no impact on economic growth below a certain level, however, once inflation exceeds that level, it becomes harmful for economic growth.

Nonlinearity in the link between inflation and economic growth was first studied by (Fisher 1993). He found that low inflation rates have a positive impact on growth while high inflation rates have a negative impact on growth. (Sarel 1996) found evidence of a significant structural break in the function relating inflation to growth that occurs when the inflation rate is 8%. (Ghosh and Phillips 1998) found that the liaison bet...

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...pital Accumulation." Journal of Monetary Economics, no. 44 (1999): 81-103.

Sidrauski, M. "Rational Choice and Patterns of Growth in a Monetary Economy." American Economic Review, no. 57 (1967): 534-544.

Stockman, A. C. "Anticipated Inflation in the Capital Stock in a Cash-in-Advance Economy." Journal of Monetary Economics, no. 8 (1981): 387-393.

Temple, J. "Inflation and Growth: Stories Short and Tall." Journal of Economic Surveys, no. 14 (2000): 395-426.

Terasvirta, T. "Specification, Estimation, and Evaluation of Smooth Transition Autoregressive Models." Journal of American Statistical Association, no. 89 (1994): 208-218.

Tobin, J. "Money and economic growth." Econometrica, no. 33 (1965): 671-684.

Vaona, A., and S. Schiavo. "Nonparametric and Semiparametric Evidence on the Long Run Effects of Inflation on Growth." Economics Letters, no. 94 (2007): 452-458.

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