Inflation Anchoring, Real Borrowing Costs, and Growth: Evidence from Sectoral Data

Sangyup Choi, Davide Furceri and Prakash Loungani

No 2019rwp-143, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: Central bankers often assert that anchoring of inflation expectations and reducing inflation uncertainty are good for economic outcomes. We test this claim and search for a relevant channel using panel data on sectoral growth for 22 manufacturing industries from 36 advanced and emerging market economies over the period 1990-2014. Our difference-in-difference strategy is based on the theoretical prediction that inflation uncertainty has larger effects in industries that are more credit constrained by increasing effective real borrowing costs. The results show that industries characterized by high external financial dependence, low asset tangibility, and high R&D intensity tend to grow faster in countries with well-anchored inflation expectations. The results are robust to controlling for the interaction between these characteristics and a broad set of macroeconomic variables over the sample period, including the level of inflation and output volatility. The results are also robust to IV techniques, using indicators of monetary policy transparency and independence as instruments.

Keywords: industry-level growth; inflation anchoring; inflation uncertainty; long-run growth; credit constraints. (search for similar items in EconPapers)
JEL-codes: E52 E63 O11 O43 O47 (search for similar items in EconPapers)
Pages: 43pages
Date: 2019-06
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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