The relationship between inflation and its variability: International evidence from the 1970s

This paper reexamines the empirical relationship between the average level of inflation and its variability. Based on a sample of 40 diverse economies, our results suggest that no one group of countries was able to avoid the decreased inflation predictability associated with higher levels of inflation during the 1970s. In contrast, previous research showed that Highly Industrialized countries, as a group, were able to control inflation variability during the period 1950–1970. Our results also suggest that the “threshold” level of inflation appears to have risen substantially during the 1970s. Whereas previous research suggested an upper bound of the threshold at about a four percent rate of inflation, the evidence from the 1970s indicates that the threshold may have risen to about a nine percent inflation rate.