Inflation crises and long-run growth

Abstract

Recent articles in the new growth literature find that growth and inflation are negatively related, a finding that is usually thought to reflect a long-run relationship. But the inflation-growth correlation is only present with high frequency data and with extreme inflation observations; there is no cross-sectional correlation between long-run averages of growth and inflation. We propose that examination of discrete high inflation crises (periods when inflation is above some threshold, which we propose to be 40% annual) helps unravel these empirical paradoxes. We establish a robust finding that growth falls sharply during discrete high inflation crises, then recovers rapidly and strongly after inflation falls.