Semiparametric Evidence on the Long-Run Effects of Inflation on Growth

Two major findings of the empirical literature on the connection between inflation and output growth is that their relationship is non linear and that there exists a threshold inflation level below which inflation has a positive impact on growth and above which inflation has a negative impact on growth. In this paper we adopt a semiparametric estimator and we show that the first finding holds true even dropping the specification assumptions typical of parametric models. We also show that a threshold level does exist and it is around 10% for developed countries and 15% for developing ones. However, below the threshold level inflation does not appear to have a positive impact on growth, rather it does not have any substantial effect on it.