Innation, Volatility and Growth

This paper reexamines the relationship between innation, innation volatility and growth using crosscountry panel data for the past 30 years. With regard to the level of innation, we nd that in contrast to current ndings which are based on cross-sectional time-average regression comparisons, exploiting the time dimension of the data reveals a strong negative correlation between innation and income growth for all but very low innation countries. To examine the role of innation uncertainty on growth, we use intra-year innation data to construct an annual measure of innation volatility. Using this measure, we nd that innation volatility is also robustly negatively correlated with growth even after the eeect of the level of innation is controlled for. Georgetown for useful discussions and comments. The opinions expressed are those of the authors and do not necessarily reeect the views of the Board of Governors of the Federal Reserve System.