Inflation crises, human capital formation and growth

Abstract

This paper shows that inflation crises may stimulate the accumulation of human kapital. A crucial idea is that high inflation undermines total factor productivity, which makes working and physical capital formation less attractive. If young agents consider high inflation to be temporary, they decide to study now and work later. During the inflation crisis the real economy declines. The increase in human capital, however, induces strong output growth after the crisis. Using GMM panel procedures, our empirical analysis for 86 countries in 1975-2000 confirms the positive effects from inflation crises on human capital. Our theoretical model and empirical results rationalize earlier empirical findings by Bruno and Easterly (Journal of Monetary Economics, 1998). As a by-product, our model is able to explain as an equilibrium phenomenon the often observed negative effects of high inflation on real wages.

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