Threshold effects in the relationship between inflation and economic growth: Further empirical evidence from the developed and developing world

Muhammad Azam and Saleem Khan

International Journal of Finance & Economics, 2022, vol. 27, issue 4, 4224-4243

Abstract: We re‐evaluate empirically the threshold effect of inflation on economic growth for 27 countries (16 developing and 11 developed economies) over 1975–2018. Our research differs from the previous one in that it employs non‐average inflation data with a balanced panel for a longer period of time. The methods of fixed effects and feasible generalized least squares (FGLS) are used to estimate the inflation threshold and its effects on growth. The empirical estimates show a significant negative association between inflation and growth above the threshold level of inflation. The empirical estimate indicates that inflation impede growth when inflation exceeds the turning point 12.23% and 5.36% in Panel‐1 and Panel‐2, respectively, and with the greatest negative effects in Panel‐2. In addition, our findings provide evidence that gross fixed capital formation, government spending, household spending and real exports stimulate economic growth while the growth rate of the population is detrimental to the growth of the regions. Overall, the empirical result of this study could be of use in providing policy direction to governments and management authorities. In developing and developed economies, the management authorities need to cogitate a maximum rate of 12.3% and 5.4%, respectively, as an inflation target to avoid the detrimental effects of high inflation on economic growth for sustaining macroeconomic stability.

Date: 2022
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