This indicator measures the government’s commitment to sound monetary policy.
Relationship to Growth & Poverty Reduction
Research shows that high levels of inflation are detrimental to long-run growth. 1 High inflation creates an environment of risk and uncertainty, drives down the rate of investment, and is often associated with distorted relative prices and tax incentives. 2 Inflation can also hinder financial market development and create incentives for corruption. 3 In addition, inflation often has a direct negative impact on the poor. When inflation is associated with swings in relative prices, it usually erodes real wages and distorts consumption decisions. 4
This indicator measures the most recent one-year change in consumer prices. The indicator reflects average annual percentage change for the year, not end-of-period data.
In keeping with economic research findings, MCC considers countries with inflation below 15 to be passing this indicator.
- 1. Bruno, M., and W. Easterly. 1998. Inflation crises and long-run growth. Journal of Monetary Economics 41(1): 3-26. Bruno, M. and Easterly, W. 1996. Inflation and growth: in search of a stable relationship. Federal Reserve Bank of St. Louis Review 78(3): 139-146. Easterly, William. 2001. The Elusive Quest for Growth. Cambridge, MA: MIT Press. Barro, R. J. 1997. Determinants of economic growth. Cambridge, Mass.: MIT Press. Andres, J. and I. Hernando. 1999. “Does Inflation harm Economic Growth? Evidence from the OECD.” in The Costs and Benefits of Price Stability, edited by M. Feldstein. Chicago: University of Chicago Press. Bolton, Daniel M. and Alexander, W. Robert J. 2001. The Differing Consequences of Low and High Rates of Inflation. Applied Economics Letters 8(6): 411-14. Fernandez Valdovinos, Carlos G. 2003. Inflation and Economic Growth in the Long Run. Economics Letters 80(2): 167-73.
- 2. De Gregorio, Jose. 1993. Inflation, Taxation and Long-Run Growth. Journal of Monetary Economics 31: 271-98. Jones, L., R. E. Manuelli and P. E. Rossi. 1993. Optimal Taxation in Models of Endogenous Growth. Journal of Political Economy 101(3): 485-517. Feldstein, Martin. 1999. “Capital Income Taxes and the Benefit of Price Stability,” in The Costs and Benefits of Achieving Price Stability, edited by M. Feldstein. Chicago: Chicago University Press. Fischer, Stanley, 1993. The Role of Macroeconomic Factors in Growth Journal of Monetary Economics 32(3): 485-512.
- 3. Boyd, John, Ross Levine, and Bruce Smith. 2001. The Impact of Inflation on Financial Sector Performance. Journal of Monetary Economics 47: 221-48. Braun, M., and R. Di Tella. 2004. Inflation, Inflation Variability, and Corruption. Economics and Politics 16(1): 77-100. Al-Marhubi, F. A. 2000. Corruption and Inflation. Economics Letters 66(2): 199-202.
- 4. Easterly, W. and Stanley Fischer. 2001. Inflation and the Poor. Journal of Money, Credit, and Banking 1: 159-178. Datt, Gaurav and Martin Ravallion. 1998. Why Have Some Indian States Done Better Than Others at Reducing Rural Poverty? Economica 65: 17-38. Agenor, Pierre-Richard. 1999. “Stabilization Policies, Poverty, and the Labor Market,” in Poverty in sub-Saharan Africa, edited by E. Thorbecke. Ithaca, NY: Cornell University Press. Romer, C. and Romer, D. 1999. “Monetary Policy and the Well-Being of the Poor.” In Income Inequality: Issues and Policy Options. Kansas City: Federal Reserve Bank of Kansas City. Pg 159-201. Cardoso, Eliana. 1992. Inflation and Poverty. NBER Working Paper 4006. Powers, Elizabeth T. 1995. Inflation, Unemployment, and Poverty Revisited. Economic Review 3: 2-13. Li, Hongyi, and Heng-fu Zou. 2002. Inflation, Growth, and Income Distribution: A Cross-country Study. Annals of Economics and Finance 3(1): 85-101.Christiaensen, L., L. Demery, and S. Paternostro. 2003. Macro and Micro Perspectives of Growth and Poverty in Africa. The World Bank Economic Review 17: 317-334. World Bank. 2005. Pro-Poor Growth in the 1990s: Lessons and Insights from 14 Countries. Washington D.C.: World Bank. Lustig, Nora. 2000. Crises and the Poor: Socially Responsible Macroeconomics. Economía 1(1): 1-30.