Threshold Effects in the Relationship Between inflation and Growth

A high and sustained growth of ouput in conjunction with low inflation is the central objective of macroeconomic policy. Not surprisingly, the question of the existence and nature of the link between inflation and growth has been the subject of considerable interest and debate. Although the debate about the precise relationship between these two variables is still open, the intensive research on this issue has uncovered some important results and a relatively wide consensus about some aspects of this relationship has been reached. It is generally accepted now that inflation has a negative effect on medium and long-term growth.2 Inflation impedes efficient resource allocation by obscuring the signalling role of relative price changes, the most important guide to efficient economic decisionmaking Fischer (1993).3