Inflation–growth relationship in selected Asian developing countries: evidence from panel data

Abstract

We question the empirical foundation of keeping inflation at 5% or below in developing economies. Using System Generalized Method of Moments we investigate the issue in the context of 14 Asian developing countries for the period 1961–2010. We find no robust empirical justification for targeting inflation at such a low level. The inflation threshold for these countries is found around 13% and it may range between 7% and 14% depending on the level of development. The findings suggest that developing countries can gain from moderate levels of inflation and should not be alarmed when inflation crosses the 5% benchmark.