Inflation-growth Relationship Research Articles

Monetary policy in a Schumpeterian economy with endogenous fertility and human capital accumulation

This study investigates the growth and welfare effects of monetary policy in a Schumpeterian economy featuring cash-in-advance (CIA) constraints and two engines of growth: innovation from R&D and human capital accumulation from endogenous fertility. Our theoretical analysis considers the cases of various CIA constraints. When the CIA constraint is only on consumption, higher inflation retards economic growth by weakening human capital accumulation. When the CIA constraint is only on R&D, higher inflation would generate a negative or U-shaped effect on economic growth, depending on the interplay between inflationary effects on innovation and human capital accumulation. When the CIA constraint is only on manufacturing, the growth effect of inflation could be positive (negative) if the positive growth effect from technological progress dominates (is dominated by) the negative effect from human capital accumulation. Our quantitative analysis finds a generally negative inflation-growth relationship in the calibrated economy. Moreover, the welfare effect of inflation is also negative, implying that the Friedman rule is optimal.

Economic growth, inflation, and banking sector competition

Empirical findings suggest that inflation and economic growth are positively correlated when inflation is initially low. However, once inflation rises above a certain threshold level, the correlation becomes negative. Furthermore, the threshold is higher for developing than for advanced economies. Why does the inflation threshold vary across countries? Using an endogenous growth model, this paper demonstrates that the inflation-growth relationship is influenced by regulatory restrictions on banks’ balance sheets and the degree of competition in the banking sector. For example, in an economy with high restrictions on banks’ activities, the threshold inflation rate is high if the banking system is not competitive and hence not deep enough (i.e., banks are holding too much liquidity). As the financial sector around the world is becoming more concentrated and subject to tighter regulation, the analysis calls for the need for coordination between monetary and macroprudential policymakers.

The Inflation-Growth Relationship in SSA Inflation-Targeting Countries

Abstract This paper investigates the relationship between inflation and economic growth for South Africa and Ghana using quarterly empirical data collected from 2001 to 2016 applied to the quantile regression method. For our full sample estimates we find that inflation is positively related with growth in Ghana at high inflation levels whilst inflation in South Africa exerts its least adverse effects at high inflation levels. However, when particularly focusing on the post-crisis period, we find inflation exerts negative effects at all levels of inflation for both countries with inflation having its least adverse effects at high levels for Ghana and at moderate levels for South Arica. Based on these findings bear important implications for inflation targeting frameworks adopted by Central Banks in both countries.

The Indian inflation–growth relationship revisited: robust evidence from time–frequency analysis

ABSTRACTThis article re-visits the inflation–growth nexus in India using the tools of wavelet, i.e. wavelet correlation, wavelet cross-correlation and scale by scale Granger causality test. Wavelet cross-correlation analysis shows that at the shortest scales inflation and economic growth were independent; at medium scales, there exists feedback effect; and at higher scales, only economic growth is leading to inflation. Furthermore, we find: (a) high and increasing dependence between inflation and economic growth, particularly after mid-2002; (b) high-frequency components of economic growth Granger-cause low-frequency component of CPI-based inflation and vice-versa, and at all scales economic growth Granger-cause inflation at scales of 4–6 and no evidence of causality was detected from WPI-based inflation to economic growth; (c) results indicate that there is no long-run causal link between inflation and economic growth. This study presents new insights for policymakers to sustain economic development by using inflation as an economic tool in India.

Institutional quality and the relationship between inflation and economic growth

While a bulk of literature in the last two decades confirms a nonlinear relationship between inflation and output growth, the inflation thresholds above which it reduces output growth remain high for developing countries compared to their developed counterparts. Cukierman et al. (Am Econ Rev 82(3):537–555, 1992) posit that the developing economies observe strong political instability and polarization, which makes inflation tax optimal choice for these countries. This study empirically supports these views by using an innovative threshold model and system GMM approaches for a large panel of 113 economies over the period 1981–2015. Moreover, our results show a minimum level of institutional quality above which the inflation–growth relationship is negative and below it is nonexistent.

Do Financial Development and Inflation Influences Malaysia Economic Growth? An Application of Bound Test

It is generally thought that there is a negative long-term relationship between inflation and growth and a positive long-term relationship between financial development and growth. The existing empirical literature suggests that the finance-growth relationship is more robust than the inflation-growth relationship. This paper empirically examines the short and long run inflation led growth nexus as well as finance led growth nexus during the period ranging from 1985 up to 2010 by using time series technique known as ARDL approach. Besides inflation, we also included other significant variables such as real gross domestic investment, foreign direct investment inflow and openness ratio to border the scope of this research. The findings revealed that inflation led growth nexus is valid for Malaysia and contributed the highest growth towards Malaysia economy as compared to financial development and other selected macroeconomic determinants.

Nonlinear impact of inflation on economic growth in South Africa: a smooth transition regression analysis

In this paper, we challenge the notion of a monotonic relationship between inflation and economic growth in South Africa. In particular, we establish threshold effects in the inflation-growth relationship using a smooth transition regression (STR) model which is applied on data collected between 2001: Q1 and 2016: Q2. Our empirical results confirm a threshold of 5.30% in which the effects of inflation on economic growth are positive below this threshold whereas inflation exerts adverse effect on economic growth at inflation levels above this level. In a nutshell, our study offers support in favour of the optimal level of inflation lying between the current 3-6% inflation target and more specifically suggests that the monetary authorities should slightly lower the upper level of this target to about 5.30% as a means creating a more conducive financial environment for promoting higher economic growth.

Inflation - Growth Nexus in Sri Lanka: is there a Threshold Level Of Inflation for Sri Lanka?

It is of significant economic importance to investigate the relationship of the inflation-growth nexus in Sri Lanka, to identify whether there is a linear or non-linear relationship between the two macro variables. This can lead to the discovery of the threshold level of inflation for Sri Lanka. Accordingly, this research explores the inflation-growth relationship in Sri Lanka, using annual data from 1965 to 2014. The results reveal an inflation rate of 9 per cent, which maximises the per capita GDP growth rate in Sri Lanka. However, the results do not confirm any significant structural break in per capita GDP growth rate when the inflation rate exceeds 9 per cent. Therefore, based on the findings, there is no statistically significant evidence to suggest the existence of a non-linear relationship between per capita GDP growth and inflation in Sri Lanka. Some conjectures, such as errors in data and not including savings and investment data can be made regarding the non-existence of a significant inflation threshold. Furthermore, the findings highlight that there is no negative effect of inflation towards the GDP per capita growth at any rate of inflation in Sri Lanka. This is an indication that any adverse effects of contemporaneous inflation are neutralized due to the significant positive effects from the inflation lag of two years. Furthermore, the results are not in favour of the view of maintaining inflation at low levels and thus, this study is important for policymakers in Sri Lanka, when implementing inflation targeting in Sri Lanka in the future.

Appropriate Threshold Level of Inflation for Economic Growth: Evidence from the Three Founding EAC Countries

This paper empirically estimated threshold level of inflation, which is conducive for economic growth in the three founding EAC countries, Kenya, Tanzania and Uganda using panel data set for the period 1970 to 2013. The non-linear quadratic model was used to estimate the threshold level or the turning point beyond which inflation exerts a negative impact on economic growth. To examine the inflation-growth relationship other moderating variables were included in the model. It was found that credit to GDP ratio, degree of openness of the economy and foreign direct investment flows to EAC member states have significant and positive impact on growth. In determining threshold level of inflation for the three EAC member states, regression results of the random effect model establish that the average rate of inflation beyond 8.46 percent has negative and significant impact on economic growth. For individual countries, findings from the Seemingly Unrelated Regression (SUR), which treats each country separately, indicate that the optimal levels of inflation for Kenya, Tanzania and Uganda are 6.77 percent, 8.80 percent and 8.41 percent, respectively, beyond which inflation starts exerting cost on economic growth. The implication for monetary policy is that policy makers in the EAC member countries need to continue putting effort in achieving and maintaining single-digit level of inflation to support economic growth.

Non-linearity in the inflation–growth relationship in developing economies: Evidence from a semiparametric panel model

Using data on developing economies, we estimate a flexible semiparametric panel data model that incorporates potentially nonlinear effects of inflation on economic growth. We find that inflation is associated with significantly lower growth only after it reaches about 12 percent, which is notably lower than the comparable estimate obtained from a threshold model. Our results also suggest that models with restrictive functional form assumptions tend to underestimate marginal effects of inflation on economic growth. We also document significant variation in the effect of inflation on growth across countries and over time.

Non-Linearity in the Inflation-Growth Relationship in Developing Economies: Evidence from a Semiparametric Panel Model

Using data on developing economies, we estimate a flexible semiparametric panel data model that incorporates potentially nonlinear effects of inflation on economic growth. We find that inflation is associated with significantly lower growth only after it reaches about 12 percent, which is notably lower than the comparable estimate obtained from a threshold model. Our results also suggest that models with restrictive functional form assumptions tend to underestimate marginal effects of inflation on economic growth. We also document significant variation in the effect of inflation on growth across countries and over time.

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

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.

On the nonlinear relationship between inflation and economic growth

Using a large panel data set from both developed and developing economies and employing the PSTR and dynamic GMM techniques, this study highlights two aspects of the inflation–growth relationship. First, it analyzes the nonlinearity of the relationship and identifies several thresholds for the global sample and for various income-specific sub-samples. Second, it identifies some country-based macroeconomic features that influence this nonlinearity. Our empirical results substantiate both views and validate the fact that inflation–growth nonlinearity is sensitive to a country׳s level of financial development, capital accumulation, trade openness and government expenditures. Moreover, these country-specific characteristics result in some marked differences in this nonlinear relationship.

Non-Linearity in the Inflation-Growth Relationship in Developing Economies: Evidence from a Semiparametric Panel Model

Non-Linearity in the Inflation-Growth Relationship in Developing Economies: Evidence from a Semiparametric Panel Model

Non-linearities in inflation–growth nexus in the SADC region: A panel smooth transition regression approach

The main objective of central banks around the world is the achievement and maintenance of price stability, which actually creates an environment conducive for faster economic growth. Therefore, it is important for policy makers to understand the relationship between inflation and economic growth in order to make sound policies. If inflation is detrimental to economic growth, then policy makers should aim for low rates of inflation. This leads to a question; how low should the inflation rate be? Previous research in the non-linearities of the inflation–growth relationship has found that a positive relationship exists when the inflation rate is low and a negative relationship when the inflation rate is high. This implies the existence of a threshold level of inflation at which the sign switches. In this paper we use panel data for the period 1980–2008 to examine the inflation–growth nexus in the Southern African Development Community (SADC) region and to endogenously determine the threshold level of inflation. To deal with problems of endogeneity and heterogeneity, the paper uses the Panel Smooth Transition Regression (PSTR) method developed by González et al. (2005) to examine the non-linearities in the inflation–growth nexus. This technique further estimates the smoothness of the transition from a low inflation to a high inflation regime. The findings reveal a threshold level of 18.9%, above which inflation is detrimental to economic growth in the SADC region.

Win or Lose, It's the Policy We Choose: Comparative Economic Performance of the Inflation Targeters

The inflation-growth relationship for the inflation targeters is estimated for the period 2001-2006. The results show that inflation is negatively correlated with economic growth, while the indicators for aggregate demand and aggregate supply are positively correlated with economic growth. The findings suggest that a combination of economic policies is more fruitful than a singular focus on inflation targeting. This conclusion is applicable to the case of the Philippines, where inflation is often driven by aggregate supply-linked factors rather than demand-linked factors.

Non-productive consumption loans and threshold effects in the inflation-growth relationship

Recent empirical evidence indicates that two inflation thresholds exist in the inflation-growth relationship. Pre-existing theoretical models, however, fail to generate such a pattern. By adding consumption loans (which are non-productive) into a standard model of imperfect information, this paper finds that an increase in the inflation rate may increase, decrease, or have no significant effect on economic growth for inflation rates below a threshold level; however, for inflation rates higher than this threshold level, an increase in the inflation rate significantly reduces economic growth. Moreover, the marginal impact of an increase in the inflation rate in terms of reducing economic growth increases with the rise in the inflation rate, until the inflation rates reach the second threshold level, from which such a marginal effect significantly decreases. These results accord well with recent empirical evidence.

Indonesia's Monetary Policy Dilemma--Constraints of Inflation Targeting

This research was motivated by current constraints on macroeconomic policy-making in Indonesia. On the fiscal side, the government is burdened with debt and the pressure to maintain social expenditure. On the monetary side, there is a preoccupation with a lower inflation rate which conflicts with the need to maintain liquidity in a repressed economy. By examining the inflation-growth relationship, this study examines whether there is any room for inflating the economy. This would ease the pressure on government debt repayment while maintaining social expenditure, and the fragile economic recovery would not be stalled by prematurely tightening monetary policy. The study finds a two-way relationship between inflation and growth; but there is some evidence of long-run neutrality of money. This implies that inflation is unlikely to affect economic growth adversely in the long-run. Based on a simple model that explicitly takes into account inflation-growth trade off, it is found that there is room for a higher inflation rate than what is currently targeted. Thus, this study favours a more expansionary macroeconomic policy mix.

DOES INFLATION AFFECT ECONOMIC GROWTH? The relevance of the debate for Indonesia

This research was motivated by the current constraints on macroeconomic policy-making in Indonesia. On the fiscal side, the government is burdened with debt and the pressure to maintain social expenditure. On the monetary side, there is a preoccupation with a lower inflation rate and the need to maintain liquidity in a depressed economy. By examining the inflation-growth relationship, this study examines whether there is any room for inflating the economy. This would ease the pressure on government debt repayment while maintaining social expenditure, and the economic recovery would not be stalled by prematurely tightening monetary policy. The study finds that there is no statistically significant relationship between inflation and growth, and argues for a more expansionary macroeconomic policy mix. It also argues that the conditions for an independent central bank do not exist in Indonesia, and such an institutional arrangement is premature when mechanisms for democratic oversight are not yet in place.

Inflation and Growth: In Search of a Stable Relationship

A re inflation and growth inversely associated, directly associated, or not associated? Is the empirical inflationgrowth relationship primarily a long-run relationship across countries, a shortrun relationship across time, or both? Like a bickering couple, inflation and growth just cannot seem to decide what their relationship should be. In this article, we characterize the literature on inflation and growth. Aware of the limits of our comparative advantage, we do not intend to do a general survey of the literature. Instead, we look at the aspects of the literature that motivated us to pursue one particular angle in our own recent work: the behavior of growth before, during, and after discrete high inflation crises.