Cross-country evidence on the link between inflation volatility and growth

Abstract

It is generally accepted that short-run monetary (mis)management, as reflected in inflation volatility, affects the long-run growth rate of the economy. This proposition is tested for a cross-section sample of 78 countries over the period 1965–85. The evidence suggests that, after controlling for other country-specific growth correlates, high inflation volatility is associated with lower mean growth. Inflation volatility was also found to have a negative effect on the productivity of investment, but does not appear to affect the share of investment of GDP. These results are also robust to an alternative data set that extends the sample period to 1994.