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Is high inflation always bad?

Nylén, Hampus LU and Nilsson, Amanda LU (2021) NEKN01 20211
Department of Economics
Abstract
Inflation targets are set by central banks worldwide to achieve stable and sustainable growth and the possibility of institutional quality affecting the inflationary effect on growth makes it essential to study the inflation-institution-growth relationship. This paper considers whether or not the relationship between inflation and growth is nonlinear in the shape of convexity and if it differs for different levels of institutional quality. A two-step system GMM approach is used on an unbalanced panel for a yearly regression with 160 countries from 2000 to 2018. The yearly regression is additionally divided into subsamples for low, medium, and high institutional quality. The same model is used for a regression with five-year averages with... (More)
Inflation targets are set by central banks worldwide to achieve stable and sustainable growth and the possibility of institutional quality affecting the inflationary effect on growth makes it essential to study the inflation-institution-growth relationship. This paper considers whether or not the relationship between inflation and growth is nonlinear in the shape of convexity and if it differs for different levels of institutional quality. A two-step system GMM approach is used on an unbalanced panel for a yearly regression with 160 countries from 2000 to 2018. The yearly regression is additionally divided into subsamples for low, medium, and high institutional quality. The same model is used for a regression with five-year averages with data covering 157 countries from 1995 to 2019. The results indicate a convex relationship, and institutional quality is estimated to be adversely correlated with the point of convexity when a convex relationship is observed. The implication is that inflation becomes less damaging to growth at a later stage than for countries with a low level of institutional quality. However, the results are not robust, and additional research is therefore needed to further determine the true nature of the relationship. (Less)
Please use this url to cite or link to this publication:
author
Nylén, Hampus LU and Nilsson, Amanda LU
supervisor
organization
alternative title
The link between inflation, institutions and growth
course
NEKN01 20211
year
type
H1 - Master's Degree (One Year)
subject
keywords
Keywords: Inflation, growth, institutional quality, two-step system GMM, convex
language
English
id
9050874
date added to LUP
2021-07-05 13:26:25
date last changed
2021-07-05 13:26:25
@misc{9050874,
  abstract     = {{Inflation targets are set by central banks worldwide to achieve stable and sustainable growth and the possibility of institutional quality affecting the inflationary effect on growth makes it essential to study the inflation-institution-growth relationship. This paper considers whether or not the relationship between inflation and growth is nonlinear in the shape of convexity and if it differs for different levels of institutional quality. A two-step system GMM approach is used on an unbalanced panel for a yearly regression with 160 countries from 2000 to 2018. The yearly regression is additionally divided into subsamples for low, medium, and high institutional quality. The same model is used for a regression with five-year averages with data covering 157 countries from 1995 to 2019. The results indicate a convex relationship, and institutional quality is estimated to be adversely correlated with the point of convexity when a convex relationship is observed. The implication is that inflation becomes less damaging to growth at a later stage than for countries with a low level of institutional quality. However, the results are not robust, and additional research is therefore needed to further determine the true nature of the relationship.}},
  author       = {{Nylén, Hampus and Nilsson, Amanda}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Is high inflation always bad?}},
  year         = {{2021}},
}