Inflation Anchoring and Growth: Evidence from Sectoral Data

By Sangyup Choi, Davide Furceri, Prakash Loungani

March 2, 2018

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Sangyup Choi, Davide Furceri, and Prakash Loungani. Inflation Anchoring and Growth: Evidence from Sectoral Data, (USA: International Monetary Fund, 2018) accessed November 8, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Central bankers often assert that low inflation and anchoring of inflation expectations are good for economic growth (Bernanke 2007, Plosser 2007). We test this claim using panel data on sectoral growth for 22 manufacturing industries for 36 advanced and emerging market economies over the period 1990-2014. Inflation anchoring in each country is measured as the response of inflation expectations to inflation surprises (Levin et al., 2004). We find that credit constrained industries—those characterized by high external financial dependence and R&D intensity and low asset tangibility—tend to grow faster in countries with well-anchored inflation expectations. The results are robust to controlling for the interaction between these characteristics and a broad set of macroeconomic variables over the sample period, such as financial development, inflation, the size of government, overall economic growth, monetary policy counter-cyclicality and the level of inflation. Importantly, the results suggest that it is inflation anchoring and not the level of inflation per se that has a significant effect on average industry growth. Finally, the results are robust to IV techniques, using as instruments indicators of monetary policy transparency and independence.

Subject: Credit, Economic sectors, Financial services, Inflation, Manufacturing, Money, Prices, Real interest rates, Short term interest rates

Keywords: Credit, Credit constraints, Effect of inflation, Expectation data, Global, Industry-level data, Inflation, Inflation anchoring, Inflation expectation, Inflation shock, Inflation surprise, Inflation variable, Inflation volatility, Low-inflation environment, Manufacturing, Medium-term growth, Real interest rates, Short term interest rates, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/036
Stock No:

WPIEA2018036
ISBN:

9781484344200
ISSN:

1018-5941

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