Working Paper: NBER ID: w4565
Authors: Stanley Fischer
Abstract: Using a regression analog of growth accounting, I present cross- sectional and panel regressions showing that growth is negatively associated with inflation, large budget deficits, and distorted foreign exchange markets. Supplementary evidence suggests that the causation runs from macroeconomic policy to growth. The framework makes it possible to identify the channels of these effects: inflation reduces growth by reducing investment and productivity growth; budget deficits also reduce both capital accumulation and productivity growth. Examination of exceptional cases shows that while low inflation and small deficits are not necessary for high growth even over long periods, high inflation is not consistent with sustained growth.
Keywords: Macroeconomic Policy; Economic Growth; Inflation; Budget Deficits; Foreign Exchange Markets
JEL Codes: E31; E62; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inflation (E31) | Growth (O00) |
| Inflation (E31) | Investment (G31) |
| Inflation (E31) | Productivity Growth (O49) |
| Budget Deficits (H62) | Capital Accumulation (E22) |
| Budget Deficits (H62) | Productivity Growth (O49) |
| Macroeconomic Policy (E60) | Growth (O00) |
| Macroeconomic Uncertainty (D89) | Investment (G31) |
| Macroeconomic Uncertainty (D89) | Productivity Efficiency (D24) |