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Does productivity growth lower inflation in Korea?

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We investigate Granger causality between productivity growth and inflation in Korea using quarterly data for the period 1985Q1–2002Q4. Our results indicate unidirectional Granger causality from productivity growth to inflation. In light of such causality, we estimate the effect of productivity and other variables on productivity. According to our regression results, a 1% increase in labour and Total Factor Productivity (TFP) reduces Consumer Price Index (CPI) inflation by 0.07–0.08% and 0.37–0.44%, respectively. Our results also suggest that the productivity-inflation nexus became stronger in Korea since the Asian financial crisis, and that this was largely due to structural reform and technological progress.
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Keywords: C32; E32; Granger causality; Korea; New Economy; O47; inflation; productivity

Document Type: Research Article

Affiliations: 1: Department of International Trade,Honam University, Gwangju 506-714, Korea 2: Macroeconomic Studies Team,Bank of Korea, 3-110 Namdaemun-ro, Jung-guSeoul 100-794, Korea 3: Economics and Research Department,Asian Development Bank, 6 ADB AvenueMandaluyong City,Metro Manila, 1550 Philippines

Publication date: 2013-06-01

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