Working Papers

Abstract

Inflation and Productive Capacity: An Empirical Risk-Reduction Model

August 23, 2021

An economy’s ability to provide food, energy, and manufactured goods for its population to consume reduces the chance that it experiences high consumer price inflation. However, no research has been done on exactly how much of these critical goods a country needs to be able to produce to keep inflation low and manageable. In this paper, I use an empirical risk reduction model to analyze over seven hundred and fifty data points from twenty-five countries over a thirty-eight-year period to show that a country can significantly reduce it chance of experiencing medium inflation and virtually eliminate the risk of hyperinflation by improving productive capacity such that its output of critical goods is approximately 174% of what the average person would consume in a country with a high standard of living.