Inflation Anchoring and Growth: Evidence from Sectoral Data
IMF Working Papers, March 2, 2018
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- Inflation Anchoring and Growth: Evidence from Sectoral Data
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Bibliographic details
- Authors: Sangyup Choi, Davide Furceri, Prakash Loungani
- Published: March 2, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484344200.001
Research question and data
- Objective: Test whether low inflation and anchoring of inflation expectations are good for economic growth.
- Sample: panel data on sectoral growth for 22 manufacturing industries for 36 advanced and emerging market economies over the period 1990-2014.
- Measurement of inflation anchoring: the response of inflation expectations to inflation surprises (Levin et al., 2004).
Key empirical findings
- 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 positive effect on growth is associated with inflation anchoring rather than the level of inflation per se.
- Results are robust to controlling for interactions between industry characteristics and a broad set of macroeconomic variables over the sample period, including:
- financial development
- inflation
- the size of government
- overall economic growth
- monetary policy counter-cyclicality
- the level of inflation
- Results are robust to IV techniques, using as instruments indicators of monetary policy transparency and independence.
Policy implications and interpretation
- Strengthening the anchoring of inflation expectations can disproportionately benefit credit constrained industries (high external financial dependence; high R&D intensity; low asset tangibility) and thereby support sectoral growth.
- Policy emphasis on monetary policy credibility, transparency, and institutional independence may improve growth outcomes via better-anchored inflation expectations.
- Consideration of industry heterogeneity is important when assessing the growth benefits of inflation-anchoring policies.
Publication and metadata
- Authors: Sangyup Choi, Davide Furceri, Prakash Loungani
- Date: March 2, 2018
- Pages: 38
- Volume: 2018
- Issue: 036
- Series: Working Paper No. 2018/036
- DOI: https://doi.org/10.5089/9781484344200.001
- Stock No: WPIEA2018036
- ISBN: 9781484344200
- ISSN: 1018-5941
- Subjects: 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
Source: IMF Working Papers — "Inflation Anchoring and Growth: Evidence from Sectoral Data" by Sangyup Choi, Davide Furceri, Prakash Loungani (March 2, 2018).
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- Inflation Anchoring and Growth: Evidence from Sectoral Data, WP/18/36, March 2018