The productivity–inflation nexus: the case of the Australian mining sector Renuka Mahadevan * , John Asafu-Adjaye School of Economics, The University of Queensland, Brisbane. Qld 4072, Australia Available online 26 November 2004 Abstract This paper examines the causal links between productivity growth and two price series given by domestic inflation and the price of mineral products in Australia’s mining sector for the period 1968/ 1969 to 1997/1998. The study also uses a stochastic translog cost frontier to generate improved estimates of total factor productivity (TFP) growth. The results indicate negative unidirectional causality running from both price series to mining productivity growth. Regression analysis further shows that domestic inflation has a small but adverse effect on mining productivity growth, thus providing some empirical support for Australia’s dinflation firstT monetary policy, at least with respect to the mining sector. Inflation in mineral price, on the other hand, has a greater negative effect on mining productivity growth via mineral export growth. D 2004 Elsevier B.V. All rights reserved. Keywords: Productivity; Inflation; Causality 1. Introduction Economic theory suggests that inflation imposes costs on an economy’s output by distorting relative prices and investment decisions. This dampens productivity growth, which in turn contributes to inflation if costs are not kept in check. Bitros and Panas (2001) argue that such results based on economy-wide analysis related to domestic inflation may be too general and not applicable to the various sectors in the economy, pointing to the 0140-9883/$ - see front matter D 2004 Elsevier B.V. All rights reserved. doi:10.1016/j.eneco.2004.10.003 * Corresponding author. Tel.: +61 7 3365 6595; fax: +61 7 3365 7299. E-mail address: r.mahadevan@economics.uq.edu.au (R. Mahadevan). Energy Economics 27 (2005) 209 – 224 www.elsevier.com/locate/eneco