The differing consequences of low and high rates of inflation

Abstract

Economic theory is inconclusive on the linkage between inflation and economic growth. Most existing evidence points to negative effects of inflation on growth emerging only at quite high levels of inflation. Making use of the spline regression technique, levels of inflation below 3% are found to be positively associated with growth while higher levels of inflation are negatively associated with growth. This sample consists of all countries with data of quality C or better and the data is fiveyearly averaged, with inflation being captured by a geometric average. The underlying model is the Mankiw et al. (1992) adaptation of the Solow-Swan model.