Abstract
According to proponents of zero-inflation policies, even low rates of inflation create distortions in capital allocation and in price signals, which result in lower rates of productivity growth. This paper tests the hypothesis that inflation has a causal impact (in the Granger sense) on labor productivity growth in manufacturing for 12 countries of the Organization for Economic Cooperation and Development (OECD). In bivariate tests of inflation and productivity and in multivariate tests using controls for cyclical effects, there is no evidence of a consistent relationship between inflation and productivity growth with regard to either sign or magnitude. Therefore, the present analysis does not support the view that further reductions in inflation from already low single-digit levels would have a positive impact on labor productivity growth for major industrial countries.
Similar content being viewed by others
References
Box, George; Jenkins, Gwilym.Time Series Analysis, revised ed., Oakland, CA: Holden Day, 1976.
Briault, Clive. "The Costs of Inflation,"Bank of England Quarterly Bulletin, February 1995, pp. 33–45.
Bruno, Michael. "Does Inflation Really Lower Growth?,"Finance and Development, September 1995, pp. 35–8.
Cameron, Norman; Hum, Derek; Simpson, Wayne. "Stylized Facts and Stylized Illusions: Inflation and Productivity Revisited,"Canadian Journal of Economics, 29, 1, February 1996, pp. 152–62.
Clark, Peter. "Inflation and the Productivity Decline,"American Economic Review, 72, 2, May 1982, pp. 149–54.
Englander, A. Stephen; Gurney, Andrew. "Medium-Term Determinants of OECD Productivity,"OECD Economic Studies, 22, Spring 1994, pp 49–109.
Feldstein, Martin. "Inflation, Tax Rules, and Investment: Some Econometric Evidence,"Econometrica, 50, 1982, pp. 825–62.
Fischer, Stanley.Indexing, Inflation, and Economic Policy, Cambridge, MA: MIT Press, 1986.
Freeman, Donald; Yerger, David. "Inflation and Total Factor Productivity in Germany: A Response to Smythe,"Weltwirtschlaftliches Archiv, 133, 1, 1997, pp. 158–63.
__. Inflation and Multifactor Productivity Growth: A Response to Smythe,"Applied Economics Letters, 5, 1998, pp. 271–4.
Hsiao, Cheng. "Autoregressive Modeling and Money-Income Causality Detection,"Journal of Monetary Economics, 7, 1981, pp. 85–106.
__. "Autoregressive Modeling and Causal Ordering of Economic Variables,"Journal of Economic Dynamics and Control, 4, 1982, pp. 243–59.
Jarret, Peter; Selody, Jack. "The Productivity-Inflation Nexus in Canada,"The Review of Economics and Statistics, 64, 3, August 1982, pp. 361–7.
Kennedy, Peter.A Guide to Econometrics, 3rd ed., Cambridge, MA: MIT Press, 1992.
Pantula, Sastry; Gonzalez-Farias, Graciela; Fuller, Wayne. "A Comparison of Unit-Root Test Criteria,"Journal of Business and Economic Statistics, October 1994, pp. 449–59.
Ram, Rati. "Causal Ordering Across Inflation and Productivity Growth in the Postwar United States,"The Review of Economics and Statistics, 66, 1984, pp. 472–7.
Saunders, Peter; Biswas, Basudeb. "An Empirical Note on the Relationship Between Inflation and Productivity in the United Kingdom,"British Review of Economic Issues, 12, 28, October 1990, pp. 67–77.
Sbordonne, Argia; Kuttner, Kenneth. "Does Inflation Reduce Productivity?,"Federal Reserve Bank of Chicago Economic Perspectives, November/December 1994, pp. 2–14.
Simos, Evangelos; Triantis, John. "A Note on Productivity, Inflation, and Causality,"Rivista Internazionale di Scienze Economiche e Commerciali, 35, 9, 1988, pp. 839–46.
Smyth, David. "Inflation and Total Factor Productivity in Germany,"Weltwirtschlaftliches Archiv, 131, 2, 1995a, pp. 403–5.
__. "The Supply Side Effects of Inflation in the United States: Evidence from Multifactor Productivity,"Applied Economics Letters, 2, 1995b, pp. 482–3.
Sparks, Christopher; Greiner, Mary. "U.S. and Foreign Productivity and Unit Labor Costs,"Monthly Labor Review, February 1997, pp. 26–35.
Thornton, Daniel. "The Costs and Benefits of Price Stability: An Assessment of Howitt's Rule,"Federal Reserve Bank of St. Louis Review, March/April 1996, pp. 23–38.
U.S. Congress, House Committee on Banking, Finance, and Urban Affairs, Subcommittee on Domestic Monetary Policy. Hearing on H.J. Resolution 409, 101st Congress, 2nd Session, Part 2, Serial 101–71, February 6, 1990.
U.S. Department of Labor, Bureau of Labor Statistics. "Foreign Labor Statistics: Description of Methods," http://stats.bls.gov/flsestpr.htm, 1998.
West, Kenneth. "On the Interpretation of Near Random Walk Behavior in GNP,"American Economic Review, 78, 1, 1988, pp. 202–9.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Freeman, D.G., Yerger, D.B. Does inflation lower productivity? Time series evidence on the impact of inflation on labor productivity in 12 OECD nations. Atlantic Economic Journal 28, 315–332 (2000). https://doi.org/10.1007/BF02298324
Issue Date:
DOI: https://doi.org/10.1007/BF02298324