INFLATION AND GROWTH

Inflation reduces the ability of economic agents to operate efficiently in a private enterprise system. To test and evaluate the strength of this effect, inflation variables are included in an empirical growth relationship for the U.S. private business sector. Both the rate of inflation and the change in the rate of inflation have significant negative effects on output growth. Two by-products of the analysis are the following. First, some but not all of the apparent post-1973 decline in productivity growth can be explained by an increase in the size of the services producing sector relative to the goods producing sector. Second, the rate of growth of private sector output is independent of the rate of growth of government non-military capital stock.