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Federal Reserve Bank of San Francisco
Working Paper Series
Moderate inflation and the deflation-depression link
Jess Benhabib
Mark M. Spiegel
Abstract

In a recent paper, Atkeson and Kehoe (2004) demonstrated the lack of a robust empirical relationship between inflation and growth for a cross-section of countries with 19th and 20th century data, concluding that the historical evidence only provides weak support for the contention that deflation episodes are harmful to economic growth. In this paper, we revisit this relationship by allowing for inflation and growth to have a nonlinear specification dependent on inflation levels. In particular, we allow for the possibility that high inflation is negatively correlated with growth, while a positive relationship exists over the range of negative-to-moderate inflation. Our results confirm a positive relationship between inflation and growth at moderate inflation levels, and support the contention that the relationship between inflation and growth is non-linear over the entire sample range.


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Jess Benhabib & Mark M. Spiegel, Moderate inflation and the deflation-depression link, Federal Reserve Bank of San Francisco, Working Paper Series 2006-32, 2006.
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Keywords: Inflation (Finance)
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