An empirical analysis of the effect of growth on inflation, Australia, Canada and the United States

Abstract

Economists often comment that inflation will tend to increase (or decrease) if growth is higher or lower than the ‘potential’ growth rate of the economy. After setting out a theoretical justification for such a relationship we estimate equations relating the change in inflation to growth rates for the US, Canada and Australia. Our system also allows for the possibility that traded goods price inflation will influence the inflation rate of consumer prices. The estimates yield ‘steady inflation rates of economic growth’ of close to 3% pa for the US and Canada and 4% for Australia. These estimated potential growth rates vary little over a variety of sub periods from the 1960s to 2000. Inflation rates of import and export prices also contribute to the explanation of inflation in some but not all sub periods.