TY  - JOUR
AU  - Bruno,Michael
AU  - Easterly,William
TI  - Inflation Crises and Long-Run Growth
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5209
PY  - 1995
Y2  - August 1995
UR  - http://www.nber.org/papers/w5209
L1  - http://www.nber.org/papers/w5209.pdf
N1  - Author contact info:
Michael Bruno

William Easterly
New York University
Department of Economics
19 W. 4th Street, 6th floor
New York NY 10012
Tel: 212/992-8684
Fax: 212/995-4186
E-Mail: william.easterly@nyu.edu
AB  - Recent literature suggests that long-run averages of growth and inflation are only weakly correlated and such correlation is not robust to exclusion of extreme inflation observations; inclusion of time series panel data has improved matters, but an aggregate parametric approach remains inconclusive.  We propose a nonparametric definition of high inflation crises as periods when inflation is above 40 percent annually.  Excluding countries with high inflation crises, we find no evidence of any consistent relationship between growth and inflation at any frequency.  However, we find that growth falls sharply during discrete high inflation crises, then recovers surprisingly strongly after inflation falls.  The fall in growth during crisis and recovery of growth after crisis tend to average out to close to zero (even slightly above zero), hence the lack of a robust cross-section correlation.  Our findings could be consistent either with trend stationarity of output, in which inflation crises are purely cyclical phenomena, or with models in which crises have a favorable long-run purgative effect.  Our findings do not support the view that reduction of high inflation carries heavy short-to-medium run output costs.
ER  -