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Krugman on the effects of a hot economy

People often suggest that a fast growing economy is inflationary.   I would argue that exactly the opposite is true.  Consider this data for Venezuela and Singapore from an old Robert Barro textbook:

Venezuela (1950-90):  Average RGDP growth = 4.4%    Average inflation = 8.0%

Singapore (1963-89):  Average RGDP growth = 8.1%    Average inflation = 3.6%

Singapore grew much faster and had much lower inflation.

On the other hand, you might argue that I’m not holding “other things equal”.  Actually, I did:

Venezuela (1950-90):  Average money (base) growth rate = 10.7%

Singapore (1963-89):  Average money (base) growth rate = 10.8%

Inflation is too much money chasing too few goods.  Because Singapore produced lots more goods, the double-digit money growth created less inflation than a similar money growth rate in Venezuela.  You might think of the faster RGDP growth as “absorbing” some of…

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