Score contribution per author:
α: calibrated so average coauthorship-adjusted count equals average raw count
What is the effect of inflation on growth? There is no consensus in existing empirical literature. This study argues that the effect may be inverted-U shaped. Using panel data for 154 countries during 1970–2014, both non-parametric cubic spline and parametric regressions show that growth is an inverted-U function of the inflation rate in samples with an annual inflation rate below 30%. The cutoff point for inflation to have a zero marginal effect on growth is around 5% in ordinary least squares estimation and 3% in instrumental variables (IV) estimation. We also find that the share of labor employed in R&D—rather than the physical capital investment rate—is an inverted-U function of inflation in IV estimation. Our inverted-U results are consistent with recent R&D-based theories. Our results on the channels help differentiate R&D-based theories from capital accumulation models, but we need future studies to differentiate between the R&D-based theories.