The Role of the Inflation Threshold in the Relationship Between Inflation and Economic Growth: An International Empirical Study

Rajab Bouzayani

MPRA Paper from University Library of Munich, Germany

Abstract: The objective of this research is to explain the link between the inflation threshold and economic growth, a major concern for economic and policy decision-makers. However, there is a contentious debate regarding whether inflation stimulates or hinders economic growth. In this context, this study seeks to answer the following question: to what extent can inflation be considered favorable to economic growth? Failing that, it examines the nature of the relationship between inflation and economic growth, as well as the determination of the inflation threshold level that allows for a linear relationship to be maintained. To do so, the study employs the non-linear least squares (SNLS) method with fixed effects, applied to five-year averages and annual data, as well as the likelihood ratio (LR) test. These tools provide appropriate estimation and inference procedures for a sample of 128 countries, including both industrialized and developing countries, over the period 1980–2019. The data primarily come from the World Bank databases (2024) and Netcraft (2022). The econometric results indicate that, to ensure sustainable economic growth, the inflation threshold should be between 1% and 3% for industrialized countries and between 11% and 12% for developing countries. The inverse relationship between inflation and economic growth, when the inflation rate exceeds this threshold, remains robust to the non-linear least squares (SNLS) technique and linear models. These results are not affected by fixed effects, transformations of the inflation level, the removal of observations with high inflation rates, data frequency, or alternative specifications.

Keywords: Dynamic; Panel; Threshold; Inflation; Economic; Growth (search for similar items in EconPapers)
JEL-codes: E0 (search for similar items in EconPapers)
Date: 2025-06-08
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