Explaining Inflation-Growth Non-Linearity Through Factors Reallocation (Article en attente)

Mercredi | 2013-02-20

Muhammad KHAN – Arslan Tariq RANA

This paper tries to explain inflation-growth non-linearity through factors reallocation using a large panel dataset of 104 countries. Our empirical results, based on instrumental variable 2SLS model, substantiate the view that inflation (weakly) enhances the accumulation of physical capital and reduces the accumulation of human capital. This indicates the presence of „Tobin effect‟ for physical capital accumulation and substitution effect (between work and education) for human capital accumulation. Moreover, this relationship is non-linear since these effects get reverse once inflation crosses certain thresholds. Finally, different macroeconomic conditions i.e financial development, trade openness and democracy can alter the sensitivity of relationship between inflation and (both physical and human) capital accumulation.