Does productivity growth lower inflation in Korea?

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.