Inflation and Economic Growth: Some International Evidence on Structuralist and Distortionist Positions: Note

Abstract

An important debate has centered on the effects of inflation on economic growth. This paper employs Granger causality tests in a diverse array of countries in an attempt to discriminate between several competing hypotheses. A central question in this debate has been whether inflation contributes to or detracts from economic growth. Felix (1961), Seers (1962), Baer (1967), Georgescu-Roegen (1970), and Taylor (1979, 1983) have advanced a structuralist argument that inflation contributes favorably to real growth. Alternatively, Campos (1961), Harberger (1963), and Vogel (1974) have argued that the inefficiencies produced by inflation reduce real growth. The structuralist view that inflation has a positive effect on growth is based on the contention that inflation is a mechanism which induces forced savings (GeorgescuRoegen 1970; Taylor 1979). First, the government of a developing country, faced with an inadequate fiscal system, may resort to borrowing from the central bank as a way to finance expenditures. Thus inflationary finance may increase capital formation if the government uses its inflation-tax revenues to increase real investment. As long as private sector investment does not fall one-for-one, inflationary finance may contribute to real growth. Second, nominal wages may lag behind prices because of slowly adjusting expectations, sluggish wage bargains, or systematic governmental wage repression. If this is so, then inflation may increase growth in neoclassical fashion by shifting the income distribution in favor of higher saving capitalists and hence increasing savings and growth. From a more Keynesian perspective, inflation may increase growth by raising the rate of profit, thus increasing private investment. An alternative view is that inflation has a negative effect on growth (Mundell 1971; Taylor 1979). This position might be labeled the distortionary inflation view. Inflation may (with the help of government policies) create a variety of outputreducing inefficiencies (Baer 1967). First, inflation in a country with a fixed exchange rate will lead to a deteriorating trade balance and to speculative capital