Groth effects of inflation in Europe: How low is too low, how high is too high?

This paper reassesses the impact of in°ation on long-term growth for a panel of 14 EU countries. While previous research focuses on a linear nexus or allows for a piecewise linear relationship with one single threshold, we take account of a more complex relationship. We use a theoretical framework that allows for an explicit distinction between level and growth e®ects of in°ation. The empirical estimates for the full EU sample con¯rm the hypothesis that the relationship between in°ation and growth is positive for very low in°ation rates (i.e. below an estimate of 1.6%), insigni¯cant thereafter and negative for high, two-digit in°ation levels. The estimate of the in°ation level that divides the insigni¯cant from the negative e®ect is found to be higher in the group of traditional cohesion countries than for the rest of the sample.