Data for around 100 countries from 1960 to 1990 are used to assess the
effects of inflation on economic performance. If a number of country characteristics
are held constant, then regression results indicate that the impact effects from an increase in average inflation by 10 percentage points per year
are a reduction of the growth rate of real per capita GDP by 0.20.3 percentage
points per year and a decrease in the ratio of investment to GDP by 0.40.6
percentage points. Since the statistical procedures use plausible instruments
for inflation, there is some reason to believe that these relations reflect causal
influences from inflation to growth and investment. However, statistically significant
results emerge only when highinflation experiences are included in the sample. Although the adverse influence of inflation on growth
looks small, the longterm effects on standards of living are substantial. For example, a
shift in monetary policy that raises the longterm average inflation rate by 10
percentage points per year is estimated to lower the level of real GDP after 30
years by 47%, more than enough to justify a strong interest in price stability.
