The Effects of Rate and Variability of Inflation on Output Growth Variability: Evidence from Selected Countries

Abstract

The relationship between the inflation rate and its variability and its effect on output growth has been investigated widely during the last two decades. Higher inflation rates lead to higher variability in inflation which causes greater uncertainty in production and investment decisions. Consequently output growth is distorted. Logue and Sweeney (1981) argue that there is a positive effect of the inflation rate and its variability on the variability of real economic growth. In contrast to the fmdings of Logue and Sweeney (1981), Katsimbris (1985), using country level data (without pooling) for eighteen DECD countries, does not find support for the positive relationship between the inflation rate and its variability and output growth variability. According to him the positive and significant results obtained by Logue and Sweeney from the cross-section (pooled) data are not reliable because of the aggregation bias. The present study examines empirically the effects of inflation rate and its variability on output growth variability in selected countries. 1 The plan of the paper is as follows. Section 2 presents the methodology adopted in the study. The results are presented in Section 3. The last section summarises the main conclusions.