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Threshold Inflation in Pakistan

Muhammad Arby () and Amjad Ali ()
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Amjad Ali: State Bank of Pakistan

SBP Research Bulletin, 2017, vol. 13, 1-19

Abstract: Inflation is usually considered to have a non-linear relationship with economic growth: a positive relationship when inflation is low and a negative one when it is high. It is, therefore, an important research question: what is the threshold level of inflation beyond which it affects growth negatively. This paper addresses the question for the case of Pakistan. We have used two models: a quadratic model, and a regression kink model with unknown threshold for the period from 1976 to 2017, and found the threshold inflation rate for Pakistan around 6 percent. It has also been observed that, on average, one percentage point increase in inflation is associated with 0.74 percentage point increase in real GDP growth in Pakistan when inflation is below threshold level; and 0.53 percentage point decrease in real GDP growth, when inflation is above threshold level.

Keywords: Inflation; Threshold Effect; Economic growth. (search for similar items in EconPapers)
JEL-codes: E31 O40 O47 (search for similar items in EconPapers)
Date: 2017
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