The Concept of Threshold Inflation and How Threshold Inflation Relates to Economic Growth

Abstract

The relationship between inflation rate and economic growth has resulted in their correlation becoming a subject in an extensive body of empirical and theoretical studies. Many studies have focused on how inflation relates to positive or negative growth. A gap exists in the threshold value beyond which this correlation works. The study fills this gap by using the threshold model to understand a threshold value beyond which inflation negatively impacts economic growth. The research examines the positive and negative associations between inflation and economic growth, the significant threshold value of the inflation rate beyond which it adversely affects growth, and the variation of threshold value and impact across different countries and economies in different developmental stages. The method involves analyzing secondary sources to establish a theoretical framework on the negative relationship between inflation and economic growth and an empirical framework on the relationship between high and low inflation rates on economic growth and threshold values and their impact on economic growth. The method also involves examining practical examples as a strategy to show that there is a variation in inflation threshold value. The concept of threshold inflation shows that there is a value beyond which an economy of a certain country, irrespective of developmental stage, negatively affects economic growth.