Inflation‐growth nexus in developing economies: New empirical evidence from a disaggregated approach

Abstract

AbstractThis paper examines the “inflation‐growth nexus” by considering sectoral growth data of 113 developing economies. Research at the aggregate level yields mostly ambiguous results. Here, we perform a disaggregated analysis of inflation and output growth. For each sector—agriculture, industry, and services—inflation and value‐added sectoral growth, for the period 1981–2015, are considered, and sectoral inflationary spillovers are captured. Empirical analysis reveals that three major sectors of the economy react differently to various impulses of inflation, and the significance of sectoral inflation is evidenced. Inflation is found to be detrimental to the growth of industrial sector only, and when sectoral inflation is accounted for, no significant impact of inflation is found in services and agricultural sectors. The policy relevance for developing economies is that the central banks of these economies must carefully consider the differing consequences of their actions on individual sectors while taking into consideration the value‐added share of each sector in the respective economy.