International Monetary Fund

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IMF Working Paper © 1998 International Monetary Fund

This is a Working Paper and the author(s) would welcome any comments on the present text. Citations should refer to a Working Paper ofthe International Monetary Fund The v i e w s e x p r e s s e d a r e t h o s e o f the a u t h o r ( s ) a n d d o n o t

necessarily represent those of the Fund.


INTERNATIONAL MONETARY FUND Policy Development and Review Department Inflation, Disinflation, and Growth Prepared by Atish Ghosh and Steven Phillips1 Authorized for distribution by Timothy Lane May 1998


Although few would doubt that very high inflation is bad for growth, there is much less agreement about moderate inflation's effects. Using panel regressions and a nonlinear specification, this paper finds a statistically and economically significant negative relationship between inflation and growth. This relationship holds at all but the lowest inflation rates and is robust across various samples and specifications. The method of binary recursive trees identifies inflation as one the most important statistical determinants of growth. Finally, while there are short-run growth costs of disinflation, these are only relevant for the most severe disinflations, or when the initial inflation rate is well within the single-digit range.

JEL Classification Numbers: E31, 040. Keywords: inflation, growth determinants, growth regressions, robustness. Authors' E-Mail Addresses:;

We would like to thank Kadima Kalonji for research assistance, and Alan Taylor and Maurice Obstfeld for making available their computer programs. Hugh Bredenkamp, Sharmini Coorey, Peter Doyle, Stanley Fischer, Manuel Guitian, Javier Hamann, Timothy Lane, Michael Sarel, Susan Schadler, and Tsidi Tsikata provided helpful comments on an earlier draft, as did Matthew Canzonieri, Martin…...

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