ABSTRACT
This chapter examines the argument that a lower rate of inflation increases the potential growth rate of the economy, and discusses the possible size of this effect. Since a policy to reduce inflation generally has some short-run costs because it requires a temporary slowing of economic activity, it is useful to estimate its benefits in the form of higher long-run growth. Each of these factors may be measured in a variety of ways. Econometricians may be tempted to search the data to find the set of variables that were most closely related to growth in the past. In addition to variables that received economic theory suggests should be related to long-term growth, there is a vast array of factors that might plausibly have an influence. Political stability, the size of the financial sector, openness to world trade, and the size of the government sector all have been suggested as potential influences on growth.
