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What is the relationship between inflation and GDP growth?

February 1999

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 Press.

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