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Abstract:
Cross-country regressions explaining output growth often obtain a negative effect from inflation. However, that result is not robust, due to the selection of countries in sample, temporal aggregation, and omission of consequential variables in levels. This paper demonstrates some implications of these mis-specifications, both analytically and empirically. In particular, for most G-7 countries, annual time series of inflation and the log-level of output are cointegrated, thus rejecting the existence of a long-run relation between output growth and inflation. Typically, output and inflation are positively related in these cointegrating relationships: a price markup model helps interpret this surprising feature.
Full paper (240 KB PDF)
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Full paper (1456 KB Postscript)
Keywords
cointegration, cross-country regression, economic growth, inflation, long run, output.
PDF files: Adobe Acrobat Reader ZIP files: PKWARE
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Last update: July 19, 2001
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