Inflation and growth: the international evidence

Although in the current climate of inflation most are concerned with its negative repercussions, its virtues as a means of growth were once extolled by the likes of Robertson, Kaldor and Rostow. Moreover, the notion of growth via inflation was an attractive proposition to less developed countries in the 1950s as they sought to accelerate the growth of output in the face of inadequate voluntary saving and inelastic tax revenue. Although there are many reasons why in theory mild inflation may be conducive to growth, this hypothesis has yet to be empirically tested. The author analyses a broad cross-section of countries with growth as an independent variable. For both developed and developing countries the hypothesis is supported by the evidence. However, for the latter there is a negative relation between inflation and growth when annual rates of inflation exceed 10 percent.