The differing consequences of low and high rates of inflation

Economic theory is inconclusive on the linkage between inflation and econom ic growth. Most existing evidence points to negative effects of inflation o n growth emerging only at quite high levels of inflation. Making use of the spline regression technique, levels of inflation below 3% are found to be positively associated with growth while higher levels of inflation are nega tively associated with growth. This sample consists of all countries with d ata of quality C or better and the data is five-yearly averaged, with infla tion being captured by a geometric average. The underlying model is the Man kiw et al. (1992) adaptation of the Solow-Swan model.