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Growth effects of inflation in Europe: How low is too low, how high is too high?

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This paper reassesses the impact of inflation on long-term growth for a panel of 14 EU countries. While previous research focuses on a linear nexus or allows for a piecewise linear relationship with one single threshold, we take account of a more complex relationship. We use a theoretical framework that allows for an explicit distinction between level and growth effects of inflation. The empirical estimates for the full EU sample confirm the hypothesis that the relationship between inflation and growth is positive for very low inflation rates (i.e. below an estimate of 1.6%), insignificant thereafter and negative for high, two-digit inflation levels. The estimate of the inflation level that divides the insignificant from the negative effect is found to be higher in the group of traditional cohesion countries than for the rest of the sample.

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  • Jesús Crespo Cuaresma & Maria Antoinette Silgoner, 2004. "Growth effects of inflation in Europe: How low is too low, how high is too high?," Vienna Economics Papers vie0411, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:vie0411
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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