Recent literature suggests that long-run averages of growth and inflation are only
weakly correlated and such correlation is not robust to exclusion of extreme inflation
observations; inclusion of time series panel data has improved matters, but an aggregate
parametric approach remains inconclusive. We propose a nonparametric definition of
high inflation crises as periods when inflation is above 40 percent annually. Excluding
countries with high inflation crises, we find no evidence of any consistent relationship
between growth and inflation at any frequency. However, we find that growth falls
sharply during discrete high inflation crises, then recovers surprisingly strongly
after inflation falls. The fall in growth during crisis and recovery of growth after
crisis tend to average out to close to zero (even slightly above zero), hence the
lack of a robust cross-section correlation. Our findings could be consistent either
with trend stationarity of output, in which inflation crises are purely cyclical
phenomena, or with models in which crises have a favorable long-run purgative effect.
Our findings do not support the view that reduction of high inflation carries heavy
short-to-medium run output costs.