Economic Complexity and Inflation: An Empirical Analysis

This study examines the relationship between inflation and economic complexity, the set of productive capabilities and know-how embedded in the structure of an economy. It posits that economic complexity, by providing the economy with the ability to reduce macroeconomic shocks, is associated with lower inflation. Economic complexity is inferred from the overall sophistication and mix of a country’s exports. Complex economies are highly diversified and export a large number of less ubiquitous products. Using a sample of 94 countries for the period 1970 to 2014, the impact of economic complexity on inflation is estimated using the Arellano and Bond generalized method of moments estimation procedure. The empirical results show that economic complexity has a negative causal impact on inflation. This effect is statistically significant, quantitatively large, and robust. From a policy perspective, the findings suggest that development driven by economic diversification, a critical component of economic complexity, rather than export specialization, is more likely to promote low inflation, a crucial objective of macroeconomic policy.