Reexamining the relationship between inflation and growth: Do institutions matter in developing countries?

- We revisit the relationship between inflation and growth considering institutions.
- We estimate the inflation thresholds above which its effect on growth is negative.
- We find threshold levels close to the inflation targets that have been adopted in practice.
- For developing economies, the threshold falls as their institutions improve.
- The negative effect of inflation on growth increases as institutions improve.

Using a large panel of countries during the period 1950-2009, we estimate the inflation thresholds above which its association with economic growth is expected to be negative, taking into account differences in institutions across countries. First, in line with previous literature, we find that the estimated threshold is substantially higher for developing countries compared to that of developed countries. However, we further show that the inflation threshold in developing economies falls when we consider reduced groups that exceed certain levels of institutional quality. We also find that the cost of inflation increases with the quality of institutions.