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Economic Complexity and Inflation: An Empirical Analysis

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Abstract

This study examines the relationship between inflation and economic complexity, the set of productive capabilities and know-how embedded in the structure of an economy. It posits that economic complexity, by providing the economy with the ability to reduce macroeconomic shocks, is associated with lower inflation. Economic complexity is inferred from the overall sophistication and mix of a country’s exports. Complex economies are highly diversified and export a large number of less ubiquitous products. Using a sample of 94 countries for the period 1970 to 2014, the impact of economic complexity on inflation is estimated using the Arellano and Bond generalized method of moments estimation procedure. The empirical results show that economic complexity has a negative causal impact on inflation. This effect is statistically significant, quantitatively large, and robust. From a policy perspective, the findings suggest that development driven by economic diversification, a critical component of economic complexity, rather than export specialization, is more likely to promote low inflation, a crucial objective of macroeconomic policy.

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Notes

  1. Recent literature explores the determinants of economic complexity (Bahar et al., 2020; Kannen, 2020; Keneck-Massil & Nvuh-Njoya, 2021; Lapatinas, 2019; Lapatinas & Litina, 2019).

  2. The Polity IV dataset users' manual is provided in the references because the Polity IV data are no longer available and have been replaced by the Polity5 data which are available online at: https://www.systemicpeace.org/inscrdata.html.

  3. The results from endogenizing GDP per capita, which are not reported, but available upon request, are similar to those presented in the text. That is, the coefficient estimates on the ECI are negative, statistically significant and robust.

  4. On how economic complexity differs from export quality, see Maggioni et al. (2016).

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Acknowledgements

The authors are grateful to an anonymous referee and the editor for making insightful and useful comments on an earlier draft.

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  1. Department of Economics and Finance, College of Economics and Political Science, Sultan Qaboos University, PC 123, P.O. Box. 20, Al Khodh, Oman

    Fahim Al Marhubi

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Al Marhubi, F. Economic Complexity and Inflation: An Empirical Analysis. Atl Econ J 49, 259–271 (2021). https://doi.org/10.1007/s11293-021-09727-0

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