Another look at the inflation-productivity trade-off

George C. Bitros () and Epaminondas Panas
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Epaminondas Panas: Athens University of Economics & Business

Macroeconomics from EconWPA

Abstract: Our aim in this paper is to test the robustness of the relation between total factor productivity growth and inflation to the specification of the model adopted for its identification. In doing so we estimate a generalized Box-Box cost function using data from the two-digit Standard Industrial Classification of manufacturing industries in Greece during the period 1964-1980. The results confirm that the acceleration of inflation from 1964-1972 to 1973-1980 reduced total factor productivity growth in a way that was both statistically significant and sizeable. In addition, they reveal that, even when the effect of inflation is separated from the effects of technical change and economies of scale, the choice of functional form is most crucial. The reason being that cost functions such as the translog, the generalized Leontief, and the generalized square root quadratic are not general enough to account for the sensitivity of estimates to model specification. On these grounds then we conclude that, for a precise estimation of the adverse impact of inflation on total factor productivity growth, it is imperative both to sort out the three effects involved and do so by adopting the most general flexible functional form available for the cost function.

Keywords: inflation; total factor productivity; generalized Box-Cox cost function; economic growth (search for similar items in EconPapers)
JEL-codes: E31 O47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev and nep-mac
Date: Written 2005-06-02
Note: Type of Document - pdf; pages: 19
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http://129.3.20.41/eps/mac/papers/0506/0506001.pdf (application/pdf)

Related works:
Working Paper: Another Look at the Inflation-Productivity Trade-Off (1999)
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