Examining the Robustness of the Inflation and Growth Relationship

Abstract

Using Bayesian Model Averaging, we examine whether inflation's effects on economic growth are robust to model uncertainty across numerous specifications. Cross‐sectional data provide little evidence of a robust inflation‐growth relationship, even after allowing for non‐linear effects. Panel data with fixed effects suggest inflation is one of the more robust variables affecting growth, and non‐linear results suggest that high inflation observations drive the results. However, this robustness is lost when estimation is carried out with instrumental variables.

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