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Economic Research Institute Study paper


Utah State University

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The escalating inflation in the second part of the 1970s and the early 1980s has revived interest in the theoretical relationship between inflation and the growth of productivity. The standard theoretical view maintains that the unidirectional flow of causality runs from productivity changes to inflation. It assumes that productivity growth is exogenous, and that positive productivity growth is anti-inflationary because it increases the economy's aggregate supply, which in turn offsets the inflationary pressure. An obvious implication of this view is that the inflation rate could be reduced through productivity growth.