Inflation Crises and Long-Run Growth

Recent articles in the new growth literature find that growth and inflation are negatively related, a finding that is usually thought to reflect a long run relationship. But the inflation-growth correlation is only present with high frequency data and with extreme inflation observations: there is no cross-sectional correlation between long-run averages of growth and inflation. We propose that examination of discrete high inflation crises (periods when inflation is above some threshold, which we propose to be 40 percent annual) helps unravel these empirical paradoxes. We establish a robust finding that growth falls sharply during discrete high inflation crises, then recovers surprisingly strongly after inflation falls.