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Dissecting Inflation: The effects of inflation volatility on economic growth

Hansen, Eric LU and Cheung, Joel LU (2022) NEKN01 20221
Department of Economics
Abstract (Swedish)
Price stability has become an increasingly important target of policy makers.
However, the debate on the effects of inflation and economic growth is by no means settled.
It is generally agreed that inflation uncertainty harms growth, however, a common challenge
in inflation-growth studies lies in the difficulty to separate the effects of inflation rates from
inflation volatility. Using inflation rate volatility as a measure of inflation uncertainty, the
study aims to untangle the inflation-growth relationship. We hypothesise that the inflation
volatility, rather than a given inflation rate itself, has a significant effect on economic growth.
Using a system GMM regression on panel data of 162 countries, ranging from 1990 to
2019,... (More)
Price stability has become an increasingly important target of policy makers.
However, the debate on the effects of inflation and economic growth is by no means settled.
It is generally agreed that inflation uncertainty harms growth, however, a common challenge
in inflation-growth studies lies in the difficulty to separate the effects of inflation rates from
inflation volatility. Using inflation rate volatility as a measure of inflation uncertainty, the
study aims to untangle the inflation-growth relationship. We hypothesise that the inflation
volatility, rather than a given inflation rate itself, has a significant effect on economic growth.
Using a system GMM regression on panel data of 162 countries, ranging from 1990 to
2019, this study finds that it is the volatility of the inflation rate, rather than the inflation rate,
itself which affects growth. Further, the results hold when transforming the data into five-year
averages, suggesting results are significant for longer time horizons. These results are robust
when including relevant growth control variables and when changing the sample to include
only non-OECD countries. These results imply that price stability is a sound policy, but the
focus should be shifted from targeting a specific rate, to ensuring inflation is kept at a steady
and predictable rate. (Less)
Please use this url to cite or link to this publication:
author
Hansen, Eric LU and Cheung, Joel LU
supervisor
organization
course
NEKN01 20221
year
type
H1 - Master's Degree (One Year)
subject
keywords
Economic Growth, Inflation, Inflation volatility, Price Stability
language
English
id
9083433
date added to LUP
2022-10-10 09:22:28
date last changed
2022-10-10 09:22:28
@misc{9083433,
  abstract     = {{Price stability has become an increasingly important target of policy makers.
However, the debate on the effects of inflation and economic growth is by no means settled.
It is generally agreed that inflation uncertainty harms growth, however, a common challenge
in inflation-growth studies lies in the difficulty to separate the effects of inflation rates from
inflation volatility. Using inflation rate volatility as a measure of inflation uncertainty, the
study aims to untangle the inflation-growth relationship. We hypothesise that the inflation
volatility, rather than a given inflation rate itself, has a significant effect on economic growth.
Using a system GMM regression on panel data of 162 countries, ranging from 1990 to
2019, this study finds that it is the volatility of the inflation rate, rather than the inflation rate,
itself which affects growth. Further, the results hold when transforming the data into five-year
averages, suggesting results are significant for longer time horizons. These results are robust
when including relevant growth control variables and when changing the sample to include
only non-OECD countries. These results imply that price stability is a sound policy, but the
focus should be shifted from targeting a specific rate, to ensuring inflation is kept at a steady
and predictable rate.}},
  author       = {{Hansen, Eric and Cheung, Joel}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Dissecting Inflation: The effects of inflation volatility on economic growth}},
  year         = {{2022}},
}