Applied Economics, 2001, 33, 1157-1165

Inflation crises, deflation, and growth:

further evidence
HANS-JURGEN ENGELBRECHT* and CHRIS LANGLEY
Department of Applied and International Economics, College of Business Massey
University, Palmerston North, New Zealand.

Bruno and Easterly (1998) provide a simple historical description of per capita GDP
growth rates before, during and after periods of high inflation crises. The pattern of
growth shows resurgence in after-crisis growth to above the before-crisis level. The
robustness of this finding is tested against justifiable changes in the data sample used
and against different crisis definitions. The results show that after-crisis growth rates
do not recover to a level above those experienced before-crisis. In contrast to Bruno
and Easterly, the important distinction between open and closed economies is
emphasized. Only in the former case are their results that growth deviations from
the world average after-crisis improve relative to the before-crisis periods confirmed.
Finally, the pattern of growth before, during and after deflationary periods is ana-
lysed. The data reveal a potentially important asymmetry in the correlation between
deflation and growth, and inflation and growth. Low rates of deflation are associated
with a similarly negative per capita GDP growth rate as are very high rates of
inflation.

I. INTRODUCTION finding, inflation and output behaviour for different crisis

In a recent study Bruno and Easterly (1998) [henceforth BE
(1998)] found that periods of high inflation crises (defined
as annual inflation in excess of 40%) are associated with
negative growth. When the crises are over, growth
rebounds to a level higher than that experienced prior to
the crises. This phenomenon is offered as an explanation
for why a definite inflation-growth relationship has been
difficult to detect in cross-section data using averages of
variables over long periods, but why it has been detected
in higher-frequency data. It also suggests that the widely
accepted stylized fact about output losses during disinfla-
tion periods following inflation crises is erroneous (see the
references quoted in BE, 1998).
First BE's (1998) findings are investigated in detail. A
case is made for the exclusion of certain countries from
the original sample. The analysis is then repeated with
the adjusted sample. The results show that recovery in
growth rates to a level higher than the before-crisis rates
no longer occurs. In order to assess the robustness of the
definitions are analysed. Following Sarel (1996), an 8%
inflation threshold is used in an attempt to re-assess the
results with a much larger data sample that also includes
moderate inflation crises. Then the concept of a relative
crisis is implemented. Rather than a discrete inflation
threshold, the average inflation rate during the relative
crisis must be at least twice the inflation rate in noncrisis
periods. Deflationary periods are also examined.
All thefindingsindicate that BE (1998) have overstated
their case that inflation crises are not associated with long-
run effects on growth rates. The stylized fact about output
costs of disinflation might not be so easy to dismiss as
suggested by BE. For open economies, however, growth
rates do recover to above before-crisis levels relative to
the world average growth rate. The present results high-
light and reconfirm the importance of openness for output
behaviour, and growth in general (e.g. Sachs and Warner,
1995). Finally, the results suggest that low levels of defla-
tion are associated with much more severe negative growth
effects than are low levels of inflation.

^Corresponding author. E-mail: H.Engelbrecht@massey.ac.nz

Applied Economics ISSN 0003-6846 print/ISSN 1466^283 online i I 2001 Taylor & Francis Ltd 1157
http://www.tandf.co.uk/journals
DOI: 10.1080/00036840010004554
1158
The paper is organized as follows. Section II discusses
the data and methodology. The robustness of BE's (1998)
main results is then tested with adjusted data sample
(Section III). The next three sections discuss the results
obtained with alternative inflation crisis definitions.
Section VII provides a summary and concluding remarks.
II. DATA AND M E T H O D O L O G Y
The same data and basic method of analysis as BE (1998)
are used. Causality is not addressed. Neither is a structural
relationship estimated. Instead, a simple historical descrip-
tion of the inflation and growth data is provided. In par-
ticular, the aim is to show the pattern of growth rates
before, during and after inflation crises. The full data set
contains inflation and growth observations from 136 coun-
tries between 1960 and 1994. Growth rates are real per
capita GDP growth rates. Inflation rates are measured as
Consumer Price Index inflation from December to
December. This was done to make the timing of the crisis
periods more accurate.'
BE (1998) deem a crisis period to have begun if inflation
was above 40% for two consecutive years. The crisis period
is considered over when inflation was below 40% for two
consecutive years. BE (1998) chose a 40% inflation thresh-
old because their analysis showed that once inflation rises
above 40%, it is more volatile and prone to sharp accel-
erations. They derive a subsample of 31 countries from
their data that had 41 high inflation crises at some point
during the sample period. Pooled averages of inflation and
growth rates for the before-, during- and after-crisis
periods were calculated for all countries fitting the crisis
definition. It is those averages that are presented in the
result tables.
The growth averages are a simple numerical mean. The
inflation averages are a form of geometric mean.^ The
growth rates are also compared to the average world
growth rate. BE (1998) recommend this check to dismiss
the possibility that some common global factor(s) may be
influencing growth behaviour.^
The data for each country that experienced a 40% infla-
tion crisis is carefully re-examined and inclusion of some of
them found to be questionable. In particular, BE include a
H.-J. Engelbrecht and C. Langley
number of countries for which data for only two of the
three periods being compared are available: Romania,
Sudan, Suriname, Venezuela, Yugoslavia and Zambia
have no after-crisis period included; Brazil, Nigeria,
Somalia, Turkey, Uruguay and Zaire have no after-crisis
period included following their second or third crisis; Brazil
and Indonesia have no 'before first crisis' period included.
It is argued that these countries should be excluded from
the sample. By including them BE (1998) are, in efl"ect,
comparing three difl"erent sets of countries for the before-,
during- and after-crisis periods. The value of comparing
one group of countries' high inflation crises with another
group of countries' recoveries is questionable.
Furthermore, including crisis period data but no after-crisis
data for a country means the true average inflation and
growth for the crisis period are not known. Because the
crisis has not yet ended, the true average for that crisis
period may be higher or lower than the figure known so
far.
A more valid comparison is achieved if each country has
observations for all three periods (i.e. before-, during- and
after-crisis) included in the sample. Following this simple
rule the following countries are excluded altogether: Brazil,
Indonesia, Romania, Sudan, Suriname, Venezuela,
Yugoslavia and Zambia. The second or third crisis periods
from the following countries are also removed: Nigeria
(1992-1994), Somalia (1987-1988), Turkey (1984-1994),
Uruguay (1983-1994) and Zaire (1987-1994). The rest of
the data from these countries is retained as it contains at
least one complete set of before-, during- and after-crisis
periods.
Additionally, the original study included a small number
of individual annual observations that did not have both
growth and inflation figures for the same years. These are
also excluded. The affected countries and years are: Ghana
1961-1963 (during a before-crisis period), Uganda 1980
(during a crisis period) and Bolivia 1992 (during an after-
crisis period). This leaves 27 crisis periods in 22 countries.
The 8% inflation threshold sample and the relative infla-
tion crises sample are also divided into open and closed
economy groups.** The definition of open/closed is taken
from Sachs and Warner (1995). They classify the openness
of an economy according to a number of variables, includ-
ing the size of the black market exchange rate premium.

' See BE (1998) for further discussion of the data. The data set is available from the web site: http://www.worldbank.org/html/prdmg/
erthweb/growth_t.htm.
BE (1998) use the following formula: [(1 + pi{\)) x (1 + pi{2))f'^ - \, where;?i(l) and pi{2) are inflation percentages in years 1 and 2.
This formula is able to handle the negative observations present in the data.
^The world average growth rates are calculated from the data set using all available observations in each year. There are missing
observations in all years and the number missing varies from year to year. The average number of individual growth observations in each
year used to calculate the world average is 112.
It was intended to divide the original 40% crisis sample from BE (1998) into open and closed economies. Interestingly, the group of
countries in that analysis contained only one country (Bolivia) that was classed as open for the entire sample period. All other countries
were closed, unclassified or varying between open and closed during the period.
Inflation crises, deflation and growth
coverage of import quotas, average tariffs and the price
distortions resulting from the use of export marketing
boards. Only countries that are classifled as open or closed
for an entire set of before-, during- and after-crisis periods
are included in the analysis. Some countries vary between
open and closed during the sample period or are not clas-
sified at all by Sachs and Warner. These countries are
excluded from both the open and closed economy sub-
samples. The list of countries classified as open or closed
is available from the authors.'
The results tables reported below give ^-statistics that test
the null hypothesis that the means in each of the three
periods (before-, during- and after-crisis) are equal. This
is done to see if there is a statistically significant difl'erence
in inflation and growth rates between the periods. In addi-
tion, r-statistics, in parentheses, are given below each of the
pooled averages. These test whether the estimated mean is
significantly diflerent from zero.
III. BASIC RESULTS: THE ADJUSTED 40%
INFLATION THRESHOLD SAMPLE
In BE's (1998) 40% inflation crisis sample, inflation is aver-
aging 17% or lower during noncrisis periods, but is over
150% during crises. Growth is averaging 1.3% prior to the
first crisis but becomes significantly negative during crises.
Following the crises, growth rates recover strongly. Most
importantly, the after-crisis growth rate, at 2.2%, is signif-
1159
icantly higher than the before-crisis growth rate (see ibid..
Table 2, p. 9). When growth rates are differenced from the
world average, the deviation shows a similar pattern. The
before-crisis per capita GDP growth rate is below the
world average. It moves further below the world average
during the crises but strongly recovers once the crises are
over. Again there is a statistically significant improvement
from the before-crisis to after-crisis periods (ibid.). BE con-
clude that the resurgence in growth rates after the crises
could be the reason why a strong negative relationship
between inflation and growth has been hard to find in
cross section data.
Results for the adjusted sample are presented in Table 1.
The during-crisis inflation average is slightly lower at 143%
compared to 151% previously.* The growth rate during-
crisis is actually lower in the adjusted sample (1.3%)
compared to the original sample (1.1%). The key differ-
ence resulting from the changes to the sample is in the
after-crisis growth rates. Although growth still recovers
after-crisis it does not exceed the before-crisis level. As
Table 1 shows, the deviation of per capita GDP growth
rates from the world average in the adjusted sample does
still exhibit an increase in after-crisis deviation that is
above the before-crisis deviation. There is an improvement
of 1.65 percentage points, less than the 2.2 percentage
points in the original sample, but still statistically signifl-
cant.
The only changes made to the after-crisis periods are the
exclusion of Brazil and Indonesia. It appears that these two

Table 1. Forty per cent inflation crisis threshold - adjusted sample and even period adjusted sample

Per capita Inflation Per capita GDP

Inflation GDP growth rate, even Per capita growth rate.
No. of rate Per capita rate, deviation periods GDP growth deviation from
annual (geometric GDP growth from world (geometric rate, even world average.
observations average) rate average average) periods even periods
Before first crisis 374 11.9% 1.6% -0.65% 20.8% 1.3% -0.16%
(18.37) (5.04) (-2.08) (14.20) (1.80) (-0.23)
During-crises 173 143% -1.3% -2.5% 78% -2.2% -3.6%
(0.88) (-2.98) (-5.51) (4.11) (-2.89) (-4.75)
After-crises 141 18.2% 1.6% 1.0% 21.4% 1.9% 1.2%
(20.19) (5.39) (3.53) (12.47) (3.17) (2.16)
r-stat for HQ\ equality of means:
During-before 0.01 -5.34 -3.32 0.03 -3.33 -3.25
After-during -0.01 5.47 6.54 -2.97 4.23 5.10
After-before 0.06 0.03 3.92 0.26 0.61 1.50

Note: 'Even period' refers to standardized period length. For each of the three periods there are 46 'even period' observations.

^ Countries were also divided into high- and low-income countries, following World Bank (1994). On this basis, the division of the sample
was almost identical to the open/closed economy split. All high-income countries have open economies. All of the low-income countries
except two (Jordan and Thailand) have closed economies. Because of this similarity, only the open/closed economy results are presented.
* Some difficulty was experienced in calculating a r-statistic for the geometric mean of inflation. Technically, geometric means do not have
a t distribution. The geometric mean is lower than the numerical mean and when divided by a standard error (calculated in the normal
way) the resulting /-statistic is small. However, the importance of this problem is limited. Testing whether an average inflation rate of
143% is statistically different from zero does not make economic sense nor does it have a major bearing on the results.
1160
countries, with strong after-crisis growth rates, were the
driving force behind the recovery in growth to above the
before-crisis level reported by BE. Brazil's after-crisis per-
iod (1967-1975) has an average growth rate of 6.8%, while
Indonesia's (1969-1994) is 4%. These are much higher
averages than the adjusted sample average of 1.6%.
Another reason these two countries are influential is the
length of their after-crisis periods. Longer periods have
heavier weighting in the pooled average after-crisis figure.
Brazil's after-crisis period contains nine annual observa-
tions and Indonesia's contains an extraordinary 26. The
average length of post-crisis periods for the remaining
sample is only 6.4 years.
As part of their sensitivity analysis, BE (1998) test
whether period length could be aflecting the results. They
do this by standardizing period lengths to two years. For
this, only the last two years of the before-crisis period, the
first two years of the during-crisis period and the first two
years of the after-crisis period for each country are used.
This test was also done for the adjusted sample (see Table
1, last 3 columns).
With standardized period lengths the after-crisis growth
rate is above the before-crisis rate. However, this difference
is not statistically significant (with t = 0.6\, the null
hypothesis that these two means are equal cannot be
rejected). The deviation of growth rates from the world
average also shows an after-crisis increase but again this is
not significantly different from the before-crisis deviation.
To sum up, after adjusting the original sample there is
still a significant fall in growth rates during the crises but
the resurgence in growth after-crises, to above the before-
crisis level, that was a feature of BE's results, is no longer
evident. This suggests that their finding is not as robust as
first thought.
IV. T H E E I G H T P E R C E N T I N F L A T I O N
THRESHOLD SAMPLE
For many countries, knowing that inflation is harmful to
growth once above 40% is useful but of little practical
relevance, as inflation never reaches that level. In this sec-
tion the inflation crisis threshold is lowered to include more
low inflation countries. BE (1998) also investigate crisis
periods of between 20% and 40% inflation. The results
are weaker than for the 40% threshold with no resurgence
in after-crisis growth evident. That sample still did not
contain a significant number of industrialized low inflation
countries (see, ibid.. Table 5, p. 16). By choosing a lower
crisis threshold, the present authors endeavour to use data
from those low inflation countries.
' One may also ask how significant is the 16% inflation during the crises? To get some idea of this the inflation rates from each of the
three periods were differenced from the world average inflation. Inflation is below the world average both before and after the crises but
is not significantly diflerent from the world average during the crises.
H.-J. Engelbrecht and C. Langley
An inflation crisis is now deemed to have begun if annual
inflation is in excess of 8% for two consecutive years. The
crisis is over once inflation is below 8% for two consecutive
years. This threshold has been chosen following the work
of Sarel (1996), who identifies a significant structural break
in the function that relates inflation to growth at the 8%
level. The effect of inflation on growth below the break is
either insignificant or even slightly positive, but it becomes
strongly negative as inflation climbs above 8%. This sug-
gests 8% as a useful crisis threshold beyond which the
inflation rate is likely to be more costly in terms of lost
growth.
Eighty-four crisis periods in 64 countries are identified.
The results, shown in Table 2, indicate that there is a sig-
nificant fall in growth rates from the before to during-crisis
periods. During-crisis growth remains positive at 1.3% how-
ever. Average inflation during the crises is 16%, compared
to less than 4% in noncrisis periods. The after-crisis growth
rate is again an interesting feature: at 1.14% it is actually
below the during-crisis rate, although the difference is not
statistically significant. There is definitely no after-crisis
recovery to a growth rate higher than the before-crisis
rate. It seems that when moderate inflation crises are
included in the data sample, inflation is associated with
losses in economic growth that continue after-crisis.
However, the results also show that at no time (i.e.
before-, during- or after-crisis) were the growth rates sig-
nificantly different from the world average. This suggests
the possibility that all the countries in the sample were
following a similar decline in growth rates over time. The
world average growth rate has fallen over time. The fall in
per capita GDP growth rates from 2.9% before-crisis to
1.3% during-crisis could well be the result of a global
growth decline rather than the impact of the inflation
crises.^
Dividing the sample into open and closed economies
provides a stark contrast in the pattern of growth (see
Table 2). When only open economies are included there
are 28 crisis periods in 22 countries. In these countries
growth falls during crises but it is still significantly positive
at 2.2%. There is a slight rise to 2.9% after the crises but no
recovery to above the before-crisis level. An interesting
feature of the open economy case is the deviation of per
capita GDP growth rates from the world average. This
growth deviation improves after-crisis to a level higher
than the before-crisis level. This improvement is statisti-
cally significant and is a similar pattern to that evident in
the 40% crisis sample reported by BE (1998).
When only closed economies are included there are 37
crisis periods in 28 countries. In this sample, rather than an
after-crisis recovery there is a significant worsening in
Inflation crises, deflation and growth 1161

C -^ 5 60

988
680
668
24)
ho CN
CN o o o
1
1 1 7 1 77

38%
08%

283
767
621
93)

50)
S?
o
CN o CN
7 7 17
o
a * I-; ^
o ; o o

oo o o
\O ^^ O
fN (N CN

r ^ OO OO
00 <N 00
I-- OS o ON ON (N
C <u H O H CN ^ en oi
0:0 60 T3 Cl

"O OO o^ t^ O O moo
aQ o S ^H o CN OO O\ VD rrt 00 \o
S O febiS

o
"^ o\ o\ "o r-
OS ^^ O\ 00 O

,<i c3 O

I O

r-2 B 2
-H OS tN 00 <N
60 S T3 o 0,0 00

1
-s:
BQ
(N S Tf -^ ^ O "O
I I I

I I I ''^ 5? O 00 CN
<N 00

i
O 00 -
g rj- vo t^ rn rn
(N ' (S

o
in
6 OS oo a*
VO o ^ 60 Jj
'ter-c ses
fore rst

t5oT3 X)
c o e C i i
Duri
Afte:
mea

Afte:
iring

tat f
sis

sis

n BQ
s< *i* p
1162
growth rates. Growth is 2.08% before-crisis, falls to 1.1%
during-crisis and then M\s further to 0.38% after-crisis.
The deviation of growth rates from the world average
shows that growth rates for closed economies before-crisis
were below the world average. Growth rates then improve
to be no different from the world average during-crisis, but
worsen again to be below the world average after-crisis.
This pattern is opposite to that found for the open econ-
omy sample. These results suggest that in open economies
growth is better able to endure and recover from inflation
crises. In contrast, closed economies' growth rates suffer
severely during and after inflation crises. Closed economies
seem to conform more to the conventional view that disin-
flation has a negative impact on growth rates.
V. RELATIVE-INFLATION CRISES
One of the weaknesses of the analysis undertaken so far is
that the choice of any discrete inflation crisis threshold, be
it 40% or 8%, is somewhat arbitrary (BE, 1998, p. 8).
Moreover, a particular level of inflation may be considered
a crisis in one country but not in another. For example,
20% inflation in Germany (a low inflation country) may
have a far different effect on growth than 20% inflation in
Brazil (a high inflation country). In an effort to overcome
this problem the idea of relative-inflation crises is intro-
duced. A relative crisis is defined as beginning when aver-
age inflation over at least two years is more than double the
average inflation in the preceding period. Similarly, the
crisis is over when average inflation over at least two
years is less than half the average inflation during the crisis
period.
Using the relative-crisis definition there were 84 crisis
periods in 68 countries. The results are shown in Table 3.
Average inflation during the relative crises is 40%. This is
substantially above noncrisis periods. Growth is 3% before
the crises, which is marginally above the world average.
During-crisis growth falls to 0.8%, which is marginally
below the world average. After the crises growth improves
to 1.48%, which is above the world average by 0.65%.
Neither the growth rate nor its deviation from the world
average improves after-crisis to a level that is significantly
higher than the before-crisis level. In other words, the
resurgence in growth evident in BE's (1998) 40% inflation
crisis data is not present in the relative-crisis sample. The
relative-crisis results do show statistically significant devi-
ations from the world average growth rate in all three per-
iods, whereas the 8% inflation threshold sample did not.
When the relative-crisis sample is divided into open and
closed economies, the pattern of growth rates is similar to
that found in the 8% threshold sample. For the open
economies, growth is positive and above the world average
throughout the three periods, although there is a dechne in
growth in the during-crisis period. Once again, the devi-
H.-J. Engelbrecht and C. Langley
ation of open economies' growth rates from the world
average shows an improvement after the crises. This
improvement is to a level significantly above the before-
crisis growth deviation. As was the case with the 8%
threshold, it is only this feature of the open economies
sample that shows some similarity to the resurgence in
growth rates found by BE (1998).
In the closed economy case, growth rates fall during the
crises, and fall further after-crisis, i.e. to 0.55%. At all
times (i.e. before-, during- and after-crisis) average growth
rates in the closed economies are below the world average.
Another point of difference between the two samples is
that, for closed economies, inflation during relative crises
is much higher than the corresponding rate in open econo-
mies (32.9% compared to 19.8%).
Overall, the results for the relative crisis sample are
broadly similar to those for the 8% inflation threshold
sample. Growth is lower during the crises and recovers
afterwards but not to above the before-crisis level. The
pattern of growth in open and closed economies is again
markedly different.
VI. DEFLATIONS
Given the current state of many economies in the world,
concern about periods of high inflation may be unwar-
ranted. In some cases, a period of deflation may be a
more realistic possibility. With this in mind, the same
descriptive technique is used to assess the pattern of growth
before, during and after deflationary episodes.
A deflationary period is defined as any period with less
than zero annual inflation for at least two consecutive
years. The deflationary period is over when there is a posi-
tive inflation rate for at least two consecutive years.
Deflation is less common in the data set with only 16 defla-
tionary periods in 16 countries. As Table 4 shows, the
average rate of deflation during the crises is 2.22%.
Growth is positive before the deflation, but falls to
1.37% during the crises. This fall is statistically signifi-
cant, as is the rise in growth after-crisis to 1.09%. The
after-crisis growth rate is not significantly different from
the before-crisis rate. The growth deviation is below the
world average during the deflationary period, but it is
not significantly different from the world average in the
noncrisis periods.
Similar to high inflation (40%-!-) crises, a period of
deflation appears to be associated with a negative growth
rate. The magnitude of this negative growth rate makes an
interesting comparison with the results shown in Table 1.
Approximately two percentage points of negative inflation
are associated with a negative growth rate of 1.37%,
whereas 143% of positive inflation are associated with a
similar negative growth rate of 1.3%, i.e. a small amount
of deflation is accompanied by a similar growth rate decline
Inflation crises, deflation and growth 1163

C3

O - ^ o~~ 00 ^ -^
"o <o o o * oo
O ^ (N ^ * O O (N
I I I I I I I I I

s P ^s N? ^ ^ ^N
o^ in o^ Tj- -) o
<N I-; Tf oo lO oo
r4 VO o o o " en '^ so
I I I

^ o 12 (N rN u^
O O fS
2^1

o i^ o
00 *
CO O CN CN CN

? 2 S2
2 u o > (N
60T3 <i: ca
I

CTTO^ "TTOO O " O oo oo

I ^f m ..-* m ^5 (N m r^
80 O CN OS rn r-^
CN "'

o
o
t ^ Tf OO
8 O CT\ O
en en as
3^ CN -H -' O O rn

I CN
^^
-"
O\
o
>O

I CN ' CN

I p a
p

o vq
o'o^

I o CN o CN o rn

NP ,vNp , N ^^
CN cn oo
O^ VO O^ -H 00 O -H CN CT\
o vq oq o - ^ - ^
m VO o rn ^ - od

o
ll
8 fe
o^ tn'
^ oo
fn~
CN
cfl

IU "":
O "O
t^ m
^ . CN B'=> o1 -^
tlO > 1
'p

I
5- a

rn 1
c ,P .g u,
as V <*- C lu
c ss
cris

cris

H B <
1164
Table 4. Deflation erises
No. of annual Inflation rate
observations (geometric average)
Before first crisis 219 7.60%
(13.47)
During-crises 55 -2.22%
(-5.38)
After-crises 176 11.29%
(9.00)
/-stat for HQ. equahty of means:
During-before -0.14
After-during 0.10
After-before 0.03
as is a very large amount of inflation. This suggests that
countries who specify a target band for inflation, such as
New Zealand's 0-3%, may face a far greater decline in
growth by moderately breaching the low side of the target
than by breaching the high side of the target by a similar
amount.
VII. SUMMARY AND CONCLUDING
REMARKS
A key finding of BE (1998) was that, following inflation
crises, growth rates improve to a level above those experi-
enced before the crises. It has been shown that this finding
is not robust against justifiable changes in their data
sample. Specifically, the sample was adjusted to include
only countries that had a full set of before-, during- and
after-crisis periods. Although a statistically significant
improvement in the deviation of growth rates from the
world average is still evident, the improvement in actual
growth rates does not surpass the before-crisis level.
Moreover, the resurgence in growth rates originally
reported had been driven by strong after-crisis growth in
two countries, Brazil and Indonesia. When an equal two-
year period length is used, the adjusted sample does show
an improvement in after-crisis growth rates to above the
before-crisis level, but this improvement is not statistically
significant.
When alternative crisis definitions are used, an increase
in after-crisis growth rates to above the before-crisis level is
again not evident. Results obtained using an 8% inflation
threshold are mixed. With growth showing little significant
diflerence from the world average, it is not possible to
conclude that the changes in growth rates were due to
inflation rather than some other global factor(s). Using
the concept of relative crises, results were obtained that
are more statistically significant. Although growth rates
improve after-crisis, they are not above the before-crisis
level.
H.-J. Engelbrecht and C. Langley
Per capita GDP Per capita GDP growth rate,
growth rate deviation from world average
1.37% -0.70%
(6.75) (-1.60)
-1.37% -2.74%
(-1.68) (-3.54)
1.09% 0.06%
(2.55) (0.14)
-2.95 -2.30
2.68 3.17
-0.44 1.24
Dividing both the 8% and relative crisis samples into
open and closed economy samples produces a clear result.
Open economies have higher growth rates in all periods, i.e.
before, during and after the crises. These growth rates are
always significantly above the world average growth rate.
There is also a definite after-crisis improvement in the
growth deviation, which is above the before-crisis deviation
by a statistically significant margin. The closed economies
in contrast have lower growth rates throughout the three
periods. These growth rates are always below the world
average. There is also a marked worsening in growth in
the after-crisis period.
The open versus closed economy results are in line with
findings by Sachs and Warner (1995, p. 52), who conclude
that 'closed countries systematically grow more slowly than
do open countries'. Specifically, Sachs and Warner (ibid.,
p. 47) predict that an open economy will grow on average
2.45% more than a closed economy. The present results
show that the average difl"erence in growth rates between
open and closed economies is 2.2% in the 8% threshold
sample and 2.6% in the relative-crisis sample.
Periods of (moderate) deflation are associated with nega-
tive growth. Growth becomes positive again once the defla-
tion has ended. The association of deflation and negative
growth could become important for many economies that
try to keep inflation within a low, narrow band. Breaching
the lower end of the band should be of more concern to
policy makers than breaching the upper end, because it
seems to be associated with a negative growth rate of simi-
lar magnitude to that associated with a very high rate of
inflation.
There are several results that run through many of the
examples presented in this study. First, an inflation crisis is
associated with lower growth, irrespective of which crisis
definition is used. Second, once the inflation crisis is over,
growth does not recover to a level that is higher than the
before-crisis growth rate. However, this is partly due to
other factors that caused a worldwide growth slowdown.
Third, the lower after-crisis growth rate is a statistically
significant improvement over the pre-crisis deviation from
Inflation crises, deflation and growth
the average growth rate only for open economies. Fourth,
there seems to be a long-run negative association between
inflation crises and growth rates for closed economies, but
not open economies.
To sum up, BE (1998) have over-stated their case.
Growth rates do not resume almost immediately after dis-
inflation. The data do reveal a negative relationship
between inflation and growth per se, and the empirical
puzzle why a definite inflation-growth relationship is difli-
cult to detect in cross-section studies using averages of
variables over long periods remains. However, traditional
arguments about the negative growth impact of inflation
seem to better fit closed economies, whereas open econo-
mies do experience an after-crisis increase in growth rates
relative to the world average growth rate.
1165
ACKNOWLEDGEMENTS
The authors thank William Easterly for providing helpful
information.
REFERENCES
Bruno, M. and Easterly, W. (1998) Inflation crises and long run
growth. Journal of Monetary Economics, 41, 3-26.
Sachs, J. and Warner, A. (1995) Economic reform and the process
of global integration, Brookings Papers on Economic Activity,
1, 1-118.
Sarel, M. (1996) Nonlinear effects of inflation on economic
growth, IMF Staff Papers, 43(t), 199-215.
World Bank (1994) Trends in Deveioping Economies. Washington,
DC.