A country reduces inflation drastically, and is experiencing no
GDP growth. In this case, is growth with a "little inflation" better than
no growth at all even if inflation is low?
The notion that inflation fosters growth has died a long, difficult death
in economics. For thirty years, evidence has piled up against the idea.
Certainly, in these decades, dozens of countries tried to fertilize their
economies with inflation and harvested only weeds and misery.
Unfortunately the inflation-buys-growth idea still lives on in public
policy. It is true that a surreptitious bout of inflation can temporarily
fool an economy into growing faster than it otherwise would. But afterwards,
you pay a penalty--long-term losses that may swamp the temporary gains.
This is not to say that a country moving from high inflation to low inflation
will not suffer some short-term adjustment costs. But if so, the moral
is that once you get your country into a hole (high inflation), climbing
out is likely to be painful. The answer, though, is not to get "a little
bit" back into the hole.
For Further Reading
Mankiw, N. Gregory. 1998. Principles of Economics. The Dryden
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