Inflation and Growth

Abstract

The academic literature contains a lot of theoretical work on the costs of inflation, as reviewed recently by Briault. Central bankers and most other observers view price stability as a worthy objective because they think that inflation is costly. Some of these costs involve the average rate of inflation, and others relate to the variability and uncertainty of inflation. But the general idea is that businesses and households are thought to perform poorly when inflation is high and unpredictable. The annual data were used for each country over each decade to compute a measure of inflation variability, the standard deviation of the inflation rate around its decadal mean. The upper panel considers only inflation rates below 15 percent per year, the middle panel includes values above 15 percent per year, and the lower panel covers the entire range. The positive, but imperfect, relation between variability and mean is apparent throughout.

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