The inverted-U effect of inflation on growth: Cross-country evidence

Qichun He

Economic Modelling, 2023, vol. 128, issue C

Abstract: What is the effect of inflation on growth? There is no consensus in existing empirical literature. This study argues that the effect may be inverted-U shaped. Using panel data for 154 countries during 1970–2014, both non-parametric cubic spline and parametric regressions show that growth is an inverted-U function of the inflation rate in samples with an annual inflation rate below 30%. The cutoff point for inflation to have a zero marginal effect on growth is around 5% in ordinary least squares estimation and 3% in instrumental variables (IV) estimation. We also find that the share of labor employed in R&D—rather than the physical capital investment rate—is an inverted-U function of inflation in IV estimation. Our inverted-U results are consistent with recent R&D-based theories. Our results on the channels help differentiate R&D-based theories from capital accumulation models, but we need future studies to differentiate between the R&D-based theories.

Keywords: Inflation; Inverted-U; Panel data (search for similar items in EconPapers)
JEL-codes: E52 O42 O47 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999323003139
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:128:y:2023:i:c:s0264999323003139

DOI: 10.1016/j.econmod.2023.106501

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().