DP375 | Inflation, Growth and External Debt: A View of the Landscape

Publication Date

01/02/1990

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Abstract

This paper reconsiders the relationship between inflation, economic growth and external debt, and discusses various channels through which (a) increased inflation tends to reduce growth and raise foreign indebtedness over time and (b) declining growth tends to amplify both inflation and debt. Based on a simple model of the simultaneous determination of inflation and growth, a non-parametric statistical comparison of the growth record and external indebtedness of high- and low-inflation economies reveals significantly slower growth and greater debts in the high-inflation economies since 1973. The observed growth differential indicates that the real costs of inflation over time may be high for individual countries as well as for the world economy as a whole.