The study analyzes the effect of inflation volatility on growth in the presence of different degrees of institutional development. A nonlinear growth regression specification using a system Generalized Method of Moments (GMM) procedure on a sample of 37 countries over the period 1989–2006 is estimated. While the level of inflation was found not to have a significant effect on growth, which is in line with previous studies, inflation volatility does significantly impact growth even for countries with moderately high levels on inflation. In addition and in contrast with the results of Acemoglu et al. (2003) and Easterly (2005), the study finds that policies, particularly inflation volatility, does not act as a proxy for institutions. Improving institutions will have a statistically significant positive impact on growth which will help to reduce the negative impact of inflation volatility.
AcemogluD.JohnsonS.RobinsonJ.ThaicharoenY. (2003). Institutional causes, macroeconomic symptoms: Volatility, crises and growth. Journal of Monetary Economics, 50(January), 49–123.
2.
AisenArellanoM.BondS. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application of employment equations. Review of Economic Studies, 58(2), 277–97.
3.
ArellanoM.BoverO. (1995). Another look at the instrumental variable estimation of error-components models, Journal of Econometrics, 68(1), 29–51.
4.
ArtetaC.EichengreenB.WyploszC. (2003). When does capital account liberalization help more than it hurts? In HelpmanE.SadkaE. (eds), Economic policy in the international economy, pp. 177–206. Cambridge University Press.
5.
BarroR. (1995). Inflation and economic growth, NBERWorking Papers 5326, National Bureau of Economic Research, Inc.
6.
BarroR.LeeJ. (2000). International data on educational attainment: Updates and implications. CIDWorking Paper No. 42, April.
7.
BeckT.Demirguc-KuntA.LaevenL.LevineR. (2006). Finance, firm size, and growth. Mimeo. Washington, DC: World Bank.
8.
BlundellR.BondS. (1998). Initial conditions and moment restrictions in dynamic panel data models, Journal of Econometrics, 87(1), 115–143.
9.
BlundellR.W.BondS.R.WindmeijerF. (2000). Estimation in dynamic panel data models: Improving on the performance of the standard GMM estimator’, in BaltagiB. (ed.), Nonstationary panels, panel cointegration, and dynamic panels, advances in econometrics15, JAI Press, Elsevier Science.
10.
BrunoM.EasterlyW. (1995). Inflation crises and long-run growth. NBERWorking Paper No. 5209.
11.
BullardJ.KeatingJ. (1994). Super neutrality in post war economies. Manuscript, Federal Reserve Bank of St. Louis.
12.
CaselliF.EsquivelG.LefortF. (1996). Reopening the convergence debate: A new look at cross-country growth empirics. Journal of Economic Growth, 1(3), 363–89.
13.
ChangR.KaltaniL.LoayzaN. (2005). Openness can be good for growth: The role of policy complementarities. NBERWorking Paper No. 11787.
14.
ChinnM.ItoHiro. (2005). What matters for financial development? Capital controls, institutions and interactions. NBERWP 11370.
15.
ChoiS.SmithB.BoydJ. (1995). Inflation, financial markets and capital formation. Federal Reserve Bank of Minneapolis, Research Department, WP#556.
16.
ClarkT. (1997). Cross-country evidence on long-run growth and inflation. Economic Inquiry, 35(1), 70–81.
17.
CoulsonE.RobbinsR. (1985). Inflation uncertainty and real economic activities. Applied Economic Letters, 2(11), 71–75.
18.
De GregorioJ. (1993), Inflation, taxation, and long-run growth, Journal of Monetary Economics, 31(3), 271–298.
19.
EasterlyWilliam. (2005). National policies and economic growth: A reappraisal, in AghionPhilippeDurlaufSteven (eds.), Handbook of economic growth, edition 1, volume 1, chapter 15, pp. 1015–1059. Elsevier.
20.
EdwardsS. (2001). Capital mobility and economic Performance: Are emerging economies different?NBERWorking Paper No. 8076, January.
21.
EicherT. (1993). Trade and converging growth rates in a model with endogenous human capital and technological change: Dynamic gains from trade reconsidered. Unpublished paper. Columbia University.
22.
FatásA.MihovI. (2005). Policy volatility, institutions and economic growth. CEPR Discussion Paper No. 5388.
23.
FischerS. (1993). The role of macroeconomic factors in growth. Journal of Monetary Economics, 32(3), 485–512.
24.
FriedmanM. (1977). Nobel lecture: Inflation and unemployment. Journal of Political Economy, 85(3), 451–472.
25.
GrierK.PerryM. (2000). The effects of real and nominal uncertainty on inflation and output growth in the USA. Journal of Applied Econometrics, 15, 45–58.
26.
GrierK.HenryO.OlekalnsN.ShieldsK. (2004). The asymmetric effects of uncertainty on inflation and output growth. Journal of Applied Econometrics, 19(5), 551–65.
27.
GrossmanG.HelpmanE. (1991). Innovation and growth in the global economy. Cambridge, Mass.: MIT Press.
JansenD. (1989). Does inflation uncertainty affect output growth? Further evidence. Federal Reserve Bank of St. Louis Review, (July/August), 43–54.
30.
JohnsonS.McMillanJ.WoodruffC. (2002). Property rights and finance. American Economic Review, 92(5), 1335–56.
31.
JonesL.E.ManuelliR.E. (1993), Growth and the effects of inflation, NBERWorking Paper No. 4523.
32.
La PortaR.Lopez-de-SilanesF.ShleiferA.VishnyR. (1997). Legal determinants of external finance. Journal of Finance, 52(3), 1131–50.
33.
La PortaR.Lopez-de-SilanesF.ShleiferA.VishnyR. (1998). Law and finance. Journal of Political Economy, 106, 113–1155.
34.
LevineR.ReneltD. (1992). A sensitivity analysis of cross-country growth regressions. American Economic Review, 82(4), 942–63.
35.
LeeJ. (1993). International trade, distortions, and long-run economic growth. International Monetary Fund Staff Papers, 40(2): 299–328.
36.
LucasRobert E.Jr. (1988), On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3–42.
37.
LevineR.ZervosS. (1993). What have we learned about policy and growth from cross-country analysis. American Economic Review Papers and Proceedings, 83, May, 426–30.
38.
MotleyB. (1994). Growth and inflation: A cross-country study. Federal Reserve Bank of San FranciscoWorking Paper 94–08.
39.
OrphanidesA.JudsonRuth. (1996). Inflation, volatility and growth. Board of Governors of the Federal Reserve System. in its series Finance and Economics Discussion Series with number 96–19.
40.
RebeloSergio. (1991). Growth in open economies. Policy ResearchWorking Paper Series 799, The World Bank.
41.
KingRobert G.RebeloSergio, 1990. Public policy and economic growth: Developing neoclassical implications, NBERWorking Papers 3338, National Bureau of Economic Research, Inc.
42.
RomerPaul M. (1990). Are nonconvexities important for understanding growth?, American Economic Review, American Economic Association, 80(2), 97–103.
43.
RodrikD. (1999). Where did all the growth go? External shocks, social conflict, and growth collapses. Journal of Economic Growth, 4(4), 385–412.
44.
RotherP. (2004). Fiscal policy and inflation volatility. ECBWorking Paper No. 317.
45.
SarelM. (1996). Nonlinear effects of inflation on economic growth. IMF Staff Papers, 43(1) March, 199–215.
46.
SarganJ. (1988). Testing for misspecification after estimating using instrumental variables. In MaasoumiE. (ed.), Contributions to econometrics: John Denis Sargan, Vol. 1. Cambridge: Cambridge University Press.
47.
StockmanA. (1981). Anticipated inflation and the capital stock in a cash-in-advance economy. Journal of Monetary Economics, 8(3), 387–93.
48.
TraubL. (2006). Financial openness and growth: The importance of public and private sector protections. Ph.D. thesis, Rutgers University, Unpublished.
49.
VeigaF.AisenA. (2006). Political instability and inflation volatility. NIPE WP 2, Universade do Minho.
50.
WindmeijerF. (2005). A finite sample correction for the variance of linear efficient two-step GMM estimators, Journal of Econometrics, 126, 25–51.
51.
YoungA. (1991). Learning by doing and the dynamic effects of international trade. Quarterly Journal of Economics106(2), 369–405.
