A Theory of Growth and Threshold Inflation with Estimates

Investigating the Inflation–Output Nexus for the Euro Area: Old Questions and New Results

“…Another study that uses cross-country data is by Dholakia (2020), who relies on a crosscountry data set of 58 countries for the sample period from 1995 to 2018. The study reports a threshold inflation rate of 11.0% for the full sample, while reporting some heterogeneity across economies, i.e., 4.1% for advanced economies, but a much higher threshold rate of inflation at 24.8% for emerging economies (see Dholakia et al 2021, p. 22).…”

“…When referring more explicitly to the role of uncertainty in general or inflation uncertainty in particular, it has been postulated that higher levels of inflation are generally accompanied by higher inflation uncertainty, thereby augmenting the effective cost of capital as the main determinant of investment, and thus hindering growth (see Friedman 1977). Finally, an additional role of relative prices has been advocated, arguing that inflation raises inflation uncertainty, which increases risk premia and interest rates and via changes in relative prices lowers expected returns and, thereby, also growth (see Dholakia 2020).…”

Inflation-Forecast Targeting: A New Framework for Monetary Policy?

“…If the long-term target were, for example, above 2%, the classic interest rate policy would be all the more effective in real terms. Proponents of this thinking point out that the evidence does not indicate that such an increase in the target inflation rate would have long-term negative effects on output (Blanchard et al, 2010;Kremer et al, 2013;Dorich et al, 2013;Dorich et al, 2018;Dholakia, 2020).…”