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This paper investigates various long-run relationships among the level and variability of money growth, inflation and real output growth using cross-section analysis based on 90 countries' time series data. The empirical results presented in this paper support the hypothesis that the variability of inflation is positively related to the level of inflation, and also suggest the existence of the threshold level of inflation for the sample period of the 1980s and early 1990s. The results also show that inflation variability appears to have insignificant relationships with the long-run average growth rate of real output overall. The positive relationship between two variables prevails during the 1970s, but this relationship weakens considerably during the 1980s and early 1990s. The OECD group has consistently positive slope coefficients for all considered sample periods. The empirical results of this paper also confirm the well-known proposition that money is very closely related to the rate of inflation, And, overall, the growth rate of money supply does not seem to have strong relationship with the long-run real output growth rate. However, the OECD group shows weak positive relationship between two variables, which appears to be the result of relatively strong positive correlation especially during the 1970s. For the Asian group, one of the fastest economic growth groups, the growth rate of money supply does not have one-for-one relationship with inflation, and has strong positive relationship with real output growth. This paper does not support the proposition of a significant negative relationship between the variability of money growth and the average growth rate of real output. However, especially after 1980, the relationship changes to negative. The evidence presented in this paper shows that both the level or variability of inflation and the level or variability of money growth has positive relationship with the variability of real output growth. This result suggests that we may have to consider an additional welfare cost of high inflation or high money growth (and high variability of those) since they tend to induce unstable economic growth pattern even though they play no important role on the determination of the long-run average growth rate of real output.
This book reconsiders the role of the Phillips curve in macroeconomic analysis in the first twenty years following the famous work by A. W. H. Phillips, after whom it is named. It argues that the story conventionally told is entirely misleading. In that story, Phillips made a great breakthrough but his work led to a view that inflationary policy could be used systematically to maintain low unemployment, and that it was only after the work of Milton Friedman and Edmund Phelps about a decade after Phillips' that this view was rejected. On the contrary, a detailed analysis of the literature of the times shows that the idea of a negative relation between wage change and unemployment - supposedly Phillips' discovery - was commonplace in the 1950s, as were the arguments attributed to Friedman and Phelps by the conventional story. And, perhaps most importantly, there is scarcely any sign of the idea of the inflation-unemployment tradeoff promoting inflationary policy, either in the theoretical literature or in actual policymaking. The book demonstrates and identifies a number of main strands of the actual thinking of the 1950s, 1960s, and 1970s on the question of the determination of inflation and its relation to other variables. The result is not only a rejection of the Phillips curve story as it has been told, and a reassessment of the understanding of the economists of those years of macroeconomics, but also the construction of an alternative, and historically more authentic account, of the economic theory of those times. A notable outcome is that the economic theory of the time was not nearly so naïve as it has been portrayed.
This paper examines whether there is a threshold above which financial development no longer has a positive effect on economic growth. We use different empirical approaches to show that there can indeed be "too much" finance. In particular, our results suggest that finance starts having a negative effect on output growth when credit to the private sector reaches 100% of GDP. We show that our results are consistent with the "vanishing effect" of financial development and that they are not driven by output volatility, banking crises, low institutional quality, or by differences in bank regulation and supervision.