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The conventional view in macroeconomics holds that permanent and predictable changes in the rate of inflation are neutral: in the long term, they do not affect real activity.

The effects of a permanent increase in money growth depend on the initial rate of money creation. Increases in the rate of money growth in economies that have initially low rates of money creation appear to increase the long-run level of real activity. But permanent increases in the rate of money growth in economies with initially high rates of money growth have detrimental consequences for long-run real activity.

There was a positive relationship between long-run growth and inflation at low rates of inflation, and a negative one as inflation rose.

For economies with initially low rates of inflation, modest increases in the rate of inflation are associated with higher long-run rates of real growth. But for economies with initially high rates of inflation, further increases in the inflation rate have adverse effects on real growth. Furthermore, the threshold rate of inflation is fairly low--around 1-3 percent for industrial countries, and 11-12 percent for developing countries.

For rates of inflation about the threshold level, further increases in the rate of inflation have strongly negative effects on financial [market] development. Given what is known about the relationship between financial markets and growth, it is not surprising that sufficiently high rates of inflation are detrimental to growth. Finally, we find that the thresholds in the inflation-financial relationship range from 3-6 percent. Such thresholds are consistent with existing estimates of thresholds in the inflation-growth relationship.