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Inflation and Growth

Explain the different views on the relations between inflation and growth.

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In the 1950s and 1960s, the growth costs of inflation were not considered a serious issue. The surge in inflation in the 1970s and 1980s changed views on this issue radically. Large growth costs surface only at higher rates of inflation, but the upward bias of inflationary persistence argues for keeping the inflation genie tightly in the bottle.

The last quarter of this century has witnessed a prolonged and rather unique spurt of worldwide inflation amid lower growth. After a turbulent two decades, this period now seems to be coming to an end. Very low inflation is again becoming the norm, not only in the industrial world but also in developing regions that had long been plagued by chronic inflation rates of three digits and more. In the industrial countries, growth seems to have permanently dropped. However, in some developing countries that suffered from very high inflation, the reform process may be yielding post-crisis growth rates that are higher than before the crisis.

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Explain the different views on the relations between inflation and growth.

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