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Department of Economics, Stockholm University Research Papers in Economics, Department of Economics, Stockholm University

No 1997:8:
MACROECONOMIC INSTABILITY AND GROWTH: Panel Data Analysis of Causal and Cyclical Patterns

Mahmood Arai () and Mats Kinnwall ()

Abstract: Empirical foundations for the view that high central government deficits and inflation impair growth are examined using annual data for 115 countries over the period 1960-1995. Taking into account country heterogeneity and time-specific symmetric shocks, we estimate intra-country effects of past inflation and budget deficits on growth. WE find no evidence suggesting growth costs of macroeconomic instability. Rather our results indicate reversed causality: the rate of growth determines inflation and deficits. On the other hand, there is a negative correlation between contemporaneous intra-country inflation and growth for two subperiods: the 1970s/early 1980s, influenced by adverse supply shocks, and the early 1990s characterised by adverse demand shocks. We argue that these results are compatible with a standard, stochastic macro theoretical framework.

Keywords: Growth; Inflation; Budget Deficits; (follow links to similar papers)

JEL-Codes: O11; O57; (follow links to similar papers)

14 pages, April 17, 1998

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