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Inflation and Growth

In: Business and Management

Submitted By moyghai
Words 3391
Pages 14
Abstract

The relationship between inflation and growth has remained a controversial one in both theory and empirical findings. Over the past couple of years, a lot of economists have claimed that an increase in economic growth leads to an increase in inflation and that decreased growth reduces inflation. There are several theories to explain the nature and existence of the inflation-economic growth with the theories suggesting that variety of possible conclusions. These include: Classical, Keynesian, Neo-Keynesian, Monetarist, Neo-classical and Endogenous growth theories. Studies have shown that inflation and its variability have significant real costs to the economy with several of the studies indicating that a 10% inflation rate can cause up to 3% loss in the GNP thus many governments have adopted inflation targeting as a dominant economic policy framework. While all the studies agree with Bruno and Easterly conclusion that inflation threshold will occur somewhere below 20% they differ significantly on the specific threshold rates. Most of the studies reviewed conclude that there is indeed a significant negative relationship between inflation and economic growth at high inflation rates in the long run. However, while many sophisticated techniques have been applied in an attempt to explain the relationship between inflation and economic growth; many key questions still remain unresolved.

Introduction:

The objective of this paper is to study the relationship between inflation and economic growth.

Inflation

Inflation is a sustained rise in the general level of prices over a period of time i.e. the price level. The inflation rate is the rate at which the price level increases. (Olivier Blanchard, 2013).
Economic Growth

Economic growth can be defined as the increase in the amount of the goods and services produced by an economy over time i.e. long…...

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