Inflation anchoring and growth: The role of credit constraints

Can inflation anchoring foster growth? To answer this question, we use panel data on sectoral growth for 22 manufacturing industries from 39 advanced and emerging market economies over 1990-2014 and employ a difference-in-differences strategy based on the theoretical prediction that higher inflation uncertainty particularly depresses investment in industries that are more credit constrained. Industries characterized by high external financial dependence, liquidity needs, and R&D intensity, and low asset tangibility, tend to grow faster in countries with well-anchored inflation expectations. The results, based on an IV approach-using indicators of monetary policy transparency and central bank independence as instruments-confirm our findings. (c) 2021 Elsevier B.V. All rights reserved.

Automated summary

This study examines the relationship between inflation anchoring and growth using panel data on sectoral growth in manufacturing industries. The results show that industries with high financial dependence, liquidity needs, and R&D intensity, and low asset tangibility tend to grow faster in countries with well-anchored inflation expectations.