Previous research by Smyth on the relationship between inflation and productivity growth, reported in this journal, concluded that ‘The negative effects of inflation on growth are significant and substantial’ (Smyth, 1995). We find that standard causality tests call into question the direction of causality between inflation and productivity growth. Furthermore, using vector autoregressions, including output and monetary policy variables, we conclude that the correlation between inflation and productivity growth is largely an artifact of comovements with cyclical variables.
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Freeman et al. (1998) studied this question.
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