The Nexus of Inflation and Economic Growth

Abstract

This paper examines the relationship between inflation and economic growth using the historical US data during 1947-2018 and professional forecast data. We separate the total inflation rate into two components -- expected inflation rate and unexpected inflation rate. We find that the expected inflation rate negatively predict the future GDP growth while positively predict the future growth of residential investment. When inflation was high, wealth would be reallocated away from money and into physical capital. In contrast, the unexpected inflation rate positively forecast the future growth rate of real GDP.