Is the negative correlation between inflation and growth real? An analysis of the effects of the oil supply shocks

Abstract

This paper investigates the view that the often-documented negative relationship between inflation and economic growth is largely spurious, resulting primarily from supply shocks which raise inflation and hurt growth. Evidence from tests of structural breaks is consistent with this hypothesis, but more detailed examination finds that while incorporation of supply-shock considerations does lower some of the estimates of the effects of inflation on growth for the industrial countries, these remain quite substantial. Little influence is found on the much lower estimates for developing countries.