Inflation Volatility, Institutions, and Economic Growth

Abstract

The study analyzes the effect of inflation volatility on growth in the presence of different degrees of institutional development. A nonlinear growth regression specification using a system Generalized Method of Moments (GMM) procedure on a sample of 37 countries over the period 1989–2006 is estimated. While the level of inflation was found not to have a significant effect on growth, which is in line with previous studies, inflation volatility does significantly impact growth even for countries with moderately high levels on inflation. In addition and in contrast with the results of Acemoglu et al. (2003) and Easterly (2005), the study finds that policies, particularly inflation volatility, does not act as a proxy for institutions. Improving institutions will have a statistically significant positive impact on growth which will help to reduce the negative impact of inflation volatility.