<blockquote>
<p>This is just a conceptual thought experiment. Is it possible that two countries have the same real interest rate, same GDP growth, but different inflation, one higher, one lower?</p>
</blockquote>
<p>Yes it is possible. By Fisher equation inflation can be expressed as:</p>
<p><span class="math-container">$$\pi\approx i-r $$</span></p>
<p>where <span class="math-container">$\pi$</span> is the inflation rate, <span class="math-container">$i$</span> nominal interest rate, <span class="math-container">$r$</span> real interest rate.</p>
<p>If both countries have real interest rate of 2% but country A has nominal rate of 5% it will have approximately 3% inflation and if country B has nominal interest rate 4% it will have approximately 2% inflation.</p>
<p>So it is possible to have the same real rate of interest and different rates of inflation at the same time.</p>
<p>When it comes to long term economic growth, the impact of inflation is non-linear. Small levels of inflation will not have negative effect on economic growth. Hence it would be possible to find example of two countries which both grow at lets say 2% and have the same real rates of interest, yet inflation in one country is 2% and in another 3%.</p>
<blockquote>
<p>If that's possible, can we conclude that inflation can be high without negatively affecting the economy</p>
</blockquote>
<p>No because effect of inflation on economy is non-linear. While low inflation might be desirable for an economy (see this older SE <a href="https://economics.stackexchange.com/q/5861/15517">question</a> and answers), high inflation will start having negative effect on an economy. Especially hyperinflations can be really devastating.</p>

CC BY-SA 4.0
2022-06-19T23:37:18.263Z
financially, the country with higher inflation has a higher nominal rate, so money will just flow to that country? That will have consequences too? But that seems to be "rewarding" the high inflation?
CuriousMind
CC BY-SA 4.0
2022-06-20T00:01:27.953Z
@CuriousMind if the money will flow into the country that would just move exchange rate between A and B to adjust in a way that any money flows will cease.
1muflon1
CC BY-SA 4.0
2022-06-19T23:31:27.763Z
2022-06-19T23:31:27.763Z
1muflon1
<p>This is just a conceptual thought experiment. Is it possible that two countries have the same real interest rate, same GDP growth, but different inflation, one higher, one lower?</p>
<p>If that's possible, can we conclude that inflation can be high without negatively affecting the economy?</p>
<p>[EDIT] For example, financially, the country with higher inflation has a higher nominal rate, so money will just flow to that country? That will have consequences too? But that seems to be &quot;rewarding&quot; the high inflation?</p>

<macroeconomics><inflation><interest-rate><economic-growth>
Is is possible that two economies have the same real interest rate, same GDP growth, but different inflations?
CuriousMind
# Is is possible that two economies have the same real interest rate, same GDP growth, but different inflations?

(Asked by: username_0 on 2022-06-19)

This is just a conceptual thought experiment. Is it possible that two countries have the same real interest rate, same GDP growth, but different inflation, one higher, one lower?

If that's possible, can we conclude that inflation can be high without negatively affecting the economy?

[EDIT] For example, financially, the country with higher inflation has a higher nominal rate, so money will just flow to that country? That will have consequences too? But that seems to be "rewarding" the high inflation?

**Tags:** macroeconomics, inflation, interest-rate, economic-growth


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## 1 answers

### Answer by username_1 on 2022-06-19. Score: 0 | Accepted answer

> This is just a conceptual thought experiment. Is it possible that two countries have the same real interest rate, same GDP growth, but different inflation, one higher, one lower?

Yes it is possible. By Fisher equation inflation can be expressed as:

$$\pi\approx i-r $$

where $\pi$ is the inflation rate, $i$ nominal interest rate, $r$ real interest rate.

If both countries have real interest rate of 2% but country A has nominal rate of 5% it will have approximately 3% inflation and if country B has nominal interest rate 4% it will have approximately 2% inflation.

So it is possible to have the same real rate of interest and different rates of inflation at the same time.

When it comes to long term economic growth, the impact of inflation is non-linear. Small levels of inflation will not have negative effect on economic growth. Hence it would be possible to find example of two countries which both grow at lets say 2% and have the same real rates of interest, yet inflation in one country is 2% and in another 3%.

> If that's possible, can we conclude that inflation can be high without negatively affecting the economy

No because effect of inflation on economy is non-linear. While low inflation might be desirable for an economy (see this older SE [question](https://economics.stackexchange.com/q/5861/15517) and answers), high inflation will start having negative effect on an economy. Especially hyperinflations can be really devastating.

> **Comments:**
> **username_0**: financially, the country with higher inflation has a higher nominal rate, so money will just flow to that country? That will have consequences too? But that seems to be "rewarding" the high inflation?  
> **username_1**: @username_0 if the money will flow into the country that would just move exchange rate between A and B to adjust in a way that any money flows will cease.  

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