Inflation, growth, and financial intermediation

The key role of government policies in the process of development has long been recognized. The recent availability of quality data has led to quantitative analyses of the effect such policies have on development. The reason is that in endogenous growth models, changes in output growth rates require changes in real rates of return to savings, and it turns out that changes in inflation rates have trivial effects on real rates of return and thus on output growth rates. Numerous empirical studies analyze the relationship between the behavior of inflation and the rate of growth of economies around the world. The regression results presented there implicitly ask what the growth response will be to a change in long-run monetary policy that results in a given percentage point change in the long-run rate of inflation. Empirical researchers have found that the average long-run rate of inflation in a country is negatively associated with the country’s long-run rate of growth.