4 Inflation and economic growth

Monetary expansion affects economic growth, positively or negatively, through inflation; that is, money affects output via its impact on the price level. Figure 3.1 plots the mean values of monetary growth and inflation rates for 48 developing countries over the period of 1960-89. It shows that, except for two outlying observations for Indonesia and Myanmar, the relationship between monetary growth and inflation is almost linear. Although no causality is implied, the correlation coefficient between the two is high (0.98).