Does inflation lower productivity? Time series evidence on the impact of inflation on labor productivity in 12 OECD nations

Abstract

According to proponents of zero-inflation policies, even low rates of inflation create distortions in capital allocation and in price signals, which result in lower rates of productivity growth. This paper tests the hypothesis that inflation has a causal impact (in the Granger sense) on labor productivity growth in manufacturing for 12 countries of the Organization for Economic Cooperation and Development (OECD). In bivariate tests of inflation and productivity and in multivariate tests using controls for cyclical effects, there is no evidence of a consistent relationship between inflation and productivity growth with regard to either sign or magnitude. Therefore, the present analysis does not support the view that further reductions in inflation from already low single-digit levels would have a positive impact on labor productivity growth for major industrial countries.