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Of Inflation and Growth Nexus in BRIMC Economies

Waseem Khadim, Saddam Ilyas and Bilal Mehmood
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Waseem Khadim: GC University, Lahore, Pakistan.
Saddam Ilyas: GC University, Lahore, Pakistan.
Bilal Mehmood: GC University, Lahore, Pakistan.

International Journal of Economics and Empirical Research (IJEER), 2016, vol. 4, issue 1, 32-45

Abstract: Purpose: This study aims to assess the nonlinearity in inflation-growth nexus for BRIMC economies. It also proposes a threshold level beyond which inflation becomes detrimental to growth.Methodology: Data for the period of 1970–2013 has been used to scrutinize the said nexus via dynamic panel cointegration techniques of: PMG, MG and DFE. Hausman test has been employed to choose comparatively efficient and consistent estimator among the above estimators. Findings: Our findings reveal that the relationship between economic growth and inflation within the linear frame work is significantly positive in the long run, but when we introduce a square term of inflation this relationship becomes negative though it still remains statistically significant. This sign switching behavior of inflation from positive to negative confirms the existence of non-linear relationship between inflation and economic growth in BRIMC economies. Therefore we have found out the threshold level of inflation for BRIMC economies which is based on a fixed-effect panel threshold model proposed by Hansen (1999). Our results show that inflation can hamper the growth of BRIMC economies if it exceeds the threshold level of 8.32%. Recommendations: However, below this threshold, inflation is beneficial for the long run economic growth.

Keywords: : Cointegration; Threshold model; Growth; Inflation (search for similar items in EconPapers)
JEL-codes: C3 (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:ijr:journl:v:4:y:2016:i:1:p:32-45