These are the questions that several recent empirical studies have examined, focusing specifically on whether the relationshipbetweeninflation and long-run growth is a nonlinear one. 3 In other words, at some (low) rate of inflation, the rela- tionship is positive or nonexistent, but at higher rates it becomes negative. If such a nonlinear relationship exists then it should be possible, in principle, to estimate the inflexion point, or threshold, at which the sign of the relationshipbetween the two variables would switch. The possibility of such a nonlinear relationship was first identified by Fischer (1993), who noted the existence of a positive relation- ship at low rates of inflation and a negative one as inflation rose (which weakened as inflation increased). Sarel (1996) specifically tested for the existence of a struc- tural break in the relationshipbetweeninflation and growth and found evidence of a significant structural break at an annual inflation rate of 8 percent. Below that rate, inflation does not have a significant effect on growth, or it may even show a slightly positive effect. For inflation rates greater than 8 percent, the effect is negative, statistically significant, and strong. Ignoring the existence of this threshold substantially biases the effect of inflation on growth. Ghosh and Phillips (1998), using a larger sample than Sarel’s, find a substantially lower threshold effect at 2.5 percent annual inflation rate. They also find that inflation is one of the most important statistical determinants of growth. Christoffersen and Doyle (1998) estimate the threshold level at 13 percent for transition economies. Bruno and Easterly (1998) argue that the negative relationshipbetweeninflation and growth, typically found in cross-country regressions, exists only in high- frequency data and with extreme inflation observations. They find no cross- sectional correlation between long-run averages of growth and inflation in the full sample, but detect a negative effect of inflation and growth for inflation rates higher than 40 percent. 4 A useful discussion of previous work on this issue is given in Ghosh (2000).
Finally, closer to our line of work, (Khan and Senhadji 2001) estimate the threshold level of inflation by using a balanced panel that averages time-series data over nonoverlapping half decades. The authors estimate the threshold level of inflation, above which inflation significantly slows growth, to be between 0.89% and 1.11% for industrialized countries, and between 10.62% and 11.38% for developing countries. The negative and significant relationshipbetweeninflation and growth, for inflation rates above the threshold level, is quite robust with respect to the estimation method, perturbations in the location of the threshold level, the exclusion of high inflation observations, data frequency and alternative specifications. But their results are difficult to interpret because their specification does not fit into the class of models pioneered by (Hansen 1999, Hansen 2000). 3 This implies that Hansen’s methods of inference do not necessarily apply.
Kremer et al. (2013) indicate that the existing studies using panel data on the thresholdeffects of inflation on growth might have some limitations. Since initial income played as an important variable in growth models, but it is normally being excluded among the control variables. Sometimes, even when initial income is included, the endogeneity problem occurred and eventually causing it is not taken into account as in Khan and Senhadji, (2001), Drukker et al. (2005), Bick (2010) and Seleteng et al. (2013). As a result, it might be misleading in the threshold estimation. Kremer et al. (2013) therefore propose a methodology, namely Dynamic Panel Threshold Regression (DPTR), which improve and overcome some problems building on Hansen (1999), Caner and Hansen (2004).
It is noticeable from the results as shown by growth regression model that Growth Rate of State Economy Output is positively related to the Total Inflation Rate of State Economy. This variable is highly significant as P-value is just 0.001 percent. It is a well observed from the above equation that one percent increases in output growth rate leads to 0.10 percent increase in the inflation rate in the Total Inflation Rate of State Economy. The results of our regression models have clearly proved the structuralists’ theory of inflation which expresses that inflation is essential for economic growth, and it refutes the monetarists view about inflation and economic growth who believed that inflation is detrimental to economic progress. Although, the relationshipbetweengrowth rate of output and inflation is positive, but it is not so strong as Structuralists believed as it is evident from the R 2 - value which is just 15.1%
This study examines the steady-state growth effect of inflation in an endogenous growth model in which Calvo-type nominal rigidity with endogenous contract duration and monetary friction via wage-payment-in-advance constraint are assumed. On the balanced-growth path in this model, the marginal growth effect of inflation is weakly negative or even positive at low inflation rates because the effect on average markup offsets the negative marginal growth effect through the monetary friction, but the growth effect of inflation is negative and convex at higher inflation rates because the frequency of price adjustment approaches that of the flexible-price economy and the growth effect through the nominal rigidity is dominated by the growth effect through the monetary friction. With a plausible calibration of the structural parameters, this model generates a relationshipbetweeninflation and growth that is consistent with empirical evidence, particularly in industrial countries.
This study examines the steady-state growth effect of inflation in an endogenous growth model in which Calvo-type nominal rigidity with endogenous contract du- ration and monetary friction via wage-payment-in-advance constraint are assumed. On the balanced-growth path in this model, the marginal growth effect of infla- tion is weakly negative or even positive at low inflation rates because the effect on average markup offsets the negative marginal growth effect through the monetary friction, but the growth effect of inflation is negative and convex at higher inflation rates because the frequency of price adjustment approaches that of the flexible- price economy and the growth effect through the nominal rigidity is dominated by the growth effect through the monetary friction. With a plausible calibration of the structural parameters, this model generates a relationshipbetweeninflation and growth that is consistent with empirical evidence, particularly in industrial countries.
The results also show that the per capita real GDP growth rate also significantly and positively affects the saving rate. Thus along with higher income, at higher growth rate of income, too, the saving rate is higher. The effect of dependency ratio is statistically insignificant but the negative sign provides support to the findings of Loayza et al. (2000) about the lifecycle theory that, as dependency ratio increases, saving rate would decrease. The insignificant parameter of real interest rate rejects the classical theory of positive relationship of savings with real interest rates. This is contrary to the finding of Athukorala and Sen (2004) who found a positive impact of the real interest rates on the savings in India. This is perhaps because they did not adjust for the simultaneity bias. Inflation is also found positively but statistically insignificantly related to savings in the present study. This is contrary to the findings of Chopra (1988) who obtained a significant positive impact of inflation on savings in the case of the Indian economy prior to 1982. The positive inflation coefficient can be explained in terms of the people wanting to preserve the real value of their wealth in presence of inflation, perhaps because the social security and health concerns are not adequately addressed by the existing institutional network in these countries. As a result, the inflation induced increased macroeconomic uncertainty forces people to save more. This is contrary to the findings of Heer and Suessmuth (2006).
Above studies have exogenously determined the threshold and tested for empirical signiﬁcance. Recent authors use PSTR model to resolve the drawback of the external threshold determina- tion. Omay and Öznur Kan (2010) analyze empirical relationshipbetween inﬂation and growth using PSTR model for six indus- trial countries in the period of 1972-2005. They provide evidence that there exists the inﬂation threshold level of 2.52%. Relation- ship between inﬂation and growth is negative when inﬂation rates are above this threshold level. After testing the robustness of this relationship by using Seemingly Unrelated Regression (SUR), the threshold levels change slightly from 2.42% to 3.18%, respectively. A similar study is carried by López-Villavicencio and Mignon (2011) , who estimate the growtheffects of inﬂation on a sample of 44 countries in the period of 1961-2007. Based on PSTR and GMM models, they ﬁnd that inﬂation non-linear impacts the growth with threshold level of 5% for whole sample, 1.23% for developed countries, 14.54% for emerging countries, 10.273% for upper middle countries and 19.64% for lower middle and low countries, respec- tively. They conclude that above the threshold, which inﬂation has a negative effect on growth and below which it enhances growth for developed countries. In addition, Seleteng et al. (2013) use PSTR model to estimate the inﬂation and-growthrelationship in the South African Development Community (SADC) region over the period of 1980–2008. The study ﬁnds a threshold level of 18.9% in the SADC region. Eggoh and Khan (2014) examine the thresholdeffects in the inﬂation-growthrelationship by a panel of 102 devel- oped and developing countries over the period of 1960-2009 apply- ing PSTR and GMM models. They also control some country-based macroeconomic characteristics such as ﬁnancial development, capital accumulation, trade openness and government expendi- tures, which inﬂuence this relationship. The results specially show that a threshold level of 10.5% for global, 3.4% for high-income countries, 10% for upper middle-income countries, 12.9% for lower middle-income countries and 19.5% for lower income countries, respectively. Using data with a balanced panel of 92 developing countries from 1975 to 2004, Baglan and Yoldas (2014) estimate a ﬂexible semi-parametric panel data model and ﬁnd that inﬂa- tion becomes a signiﬁcant detriment to growth only after it reaches about 12%. Moreover, they also ﬁnd that the relationship ceases to be statistically signiﬁcant at very high levels of inﬂation.
better to give a different theoretical explanation for this empirical result. In empirical literature, which deals with the bi-directional relationshipbetween output growth and inflation, there is considerable amount of study which finds negative causal effect of output growth on inflation for Turkey (Kökocak and Arslan, 2006). Thus, with this new finding, we can construct a new theoretical reasoning for our empirical result. In this case, more output growth would be accompanied by more average inflation on the contrary to Short-run Phillips Curve. Furthermore, decreasing inflation rates leads to less inflation uncertainty due to Friedman’s and Okun’s hypothesis. In summary, increasing output growth leads to less nominal uncertainty which shows that Friedman’s and Okun’s hypothesis is still valid and is not contradicted with the above arguments. Thus, we find a negative relationshipbetween output growth and nominal uncertainty by using Friedman’s and Okun’s hypothesis. Furthermore, for the transmission channel of this relationship Omay and Hasanov (2010) can be examined for Turkey.
of scale, increasing returns or induced technological change; in contrast to exogenous factors such as population growth increases (Solow, 1994). The studies of Lucas (1982), Svensson (1985) and Lucas and Stokey (1987) represent blueprint works which depict the negative effect inflation within an endogenous growth model whereby inflation acts as a tax on the return to all forms of capital and ultimately economic growth. Furthermore, these endogenous models are responsible for the emergence of dynamic nonlinear effect of inflation on growth, with the study of Gillman ad Kejak (2004) being amongst the first to depict such a nonlinear relationship in which the Tobin effect (i.e. positive inflation-growthrelationship) is found at low levels, whereas at higher levels the negative Stockman effect comes into play. The models main attribute is the ability for the representative agent to choose between two competitive mechanism, money and credit and an increased use of credit such that an initial increase in marginal cost of money (i.e. inflation)causes an initial increase in the return to capital which later turns negative hence dictating the nonlinear inflation-growthrelationship. Moreover, other theoretical studies presented by Huybens and Smith (1999) and Bose (2002). Low inflation does not distort information or interfere with resource allocation and economic activity up to certain inflationthreshold of which crossed, inflation aggravates the credit market through distorted flow of information.
Based on the results presented in Table 7, hypotheses (a), (b), (c), (e) and (f) were not rejected at 5% level of significance because their p-values are individually greater than 0.05. But the null hypothesis (d) was rejected at 5% level of significance since the p-value is less than 0.05. This means that during the period under study, there was no causality between agricultural growth and economic growth because the null hypothesis that agriculture GDP does not Granger cause GDP was not rejected. This result is inconsistent with the findings of Jatuporn, Chien, Sukprasert, and Thaipakdee (2011) who found a bi-directional relationship running from agriculture to economic growth and from economic growth to agriculture in Thailand. There was also no causality detected betweeninflation and agricultural growth at 5% level of significance, meaning that inflation does not Granger cause agriculture. The results also show that, within the sample of the study, there was unidirectional causality from economic growth to inflation in Swaziland.
In line with the study of Ahmed and Mortaza (2005) and Chowdury and Ham (2009), the paper restricts the empirical analysis of thresholdeffects in the inflation-growth correlation to the bivariate case. Ahmed and Mortaza (2005) investigate thresholdeffects in the bivariate inflation-growth correlation by estimating Hansen‟s (1997) threshold model whereas Chowdury and Ham (2009) opt for the use of a bivariate threshold autoregressive (BTVAR) model. Derivation of the BTVAR model is instigated through an augmentation of Hansen (1997) TAR model, which according to Chowdury and Ham (2009), is achieved by replacing the dependent and independent variables in the TAR model with vectors of bivariate endogenous variables. This paper builds on Chowdury and Ham (2009) by specifying a vector of bivariate endogenous (inflation and economic growth) threshold variables, which is directly incorporated into the BTVAR model specification. In limiting the study to a bivariate case study the paper is able to follow in pursuit Lo and Zivot (2001) in deriving an associated bivariate threshold vector error correction (BTVEC) mechanism directly from the BTVAR model. Developments by Lo and Zivot (2001) provide a unique approach into accommodating equilibrium adjustment mechanisms as a means of eliminating spurious relations which could possibly arise within the threshold vector autoregressive (TVAR) models. Our baseline BTVAR model is specified as:
To summarize, most of empirical research supports the idea of negative relationshipbetweengrowth and inflation, but various types of findings exist. The general finding is that betweengrowth and inflation there is a negative relationship. In some cases even low or moderate inflation rate have an impact on growth rate. In developed countries there isn’t evidence that such a correlation exists. Relationshipbetweeninflation and economic growth might be nonlinear. Developing countries and developed countries show different forms of nonlinearity in the inflation-growthrelationship and the size of the negative effect of inflation on growth declines as the inflation rate increases. Some authors advance the idea of a threshold in the dependence growth-inflation. In a case, higher inflation is associated with moderate gains in GDP growth up to a roughly 15-18 percent inflationthreshold. In a case, association betweengrowth and inflation is negative but stronger at lower levels of inflation. Control of inflation, as recommended by IMF, (Albania is one case), has been effective vis-à-vis growth in some countries. In some cases inflation could be in short run relationship with growth, but in some other also in long run relationship.
The inflation-output relationship has usually been described using the Phillips curve, which assumes that inflation rate and output growth rate are positively correlated, at least in the short run. Such a positive relationshipbetweeninflation and output is a common feature of many macroeconomic models, including sticky-wage models (Fischer, 1977; Taylor, 1979; 1980), sticky-price (or menu costs) models (Parkin, 1986; Blanchard and Kiyotaki, 1987; Caplin and Spulber, 1987), as well as misperception model of Lucas (1972). In sticky-wage models, higher inflation rate reduces average real wages and thus increases employment and hence output. In menu costs models, inflation rate reduces relative prices of monopolistic firms and as a result, demand for their products and hence output rise in response to nominal demand shocks. According to Friedman (1968), if commodity prices respond to nominal shocks faster than prices of production factors, then inflation will reduce real wages and increase employment in the short run. However, in the long run, the economy shall return to natural unemployment rate. Lucas (1972) argued that if the information content of market prices is not sufficient to distinguish between real and nominal shocks, then producers shall increase their outputs in response to all price increases in the short run. Tobin (1965) and Mundell (1963) argued that inflation might permanently increase output growth rate by stimulating capital accumulation, because in response to inflation households would hold less in money balances and more in other assets. Fischer (1979), on the other hand, argued that although steady-state capital accumulation is independent of inflation rate, inflation might increase capital accumulation on the transition path to steady-state. However, as Temple (2000) argues, it would now be hard to find much support for the view that inflation can raise output in the long run. Indeed, real business cycle models (Long and Plosser, 1983; King and Plosser, 1984; Plosser, 1989) viewed fluctuations in real economic variables, including output, as results of variations in the real opportunities of the individual agents.
315 model he developed. Van der Ploeg and Alogoskoufis (1994) addressed Sidrauski's (1967) model, in which utility was used instead of cash, and researched inflation's effects on growth (Blackburn and Hung,1996:2). Barro (1995) concludes that there is a significant negative relationshipbetweeninflation and economic growth. He reaches to the conclusion that 10% inflation increase reduces real gross national product at a rate between 0.2-0.3% annually. In a study he conducted for South Africa, Nell (2000) concluded that when inflation is at single-digit numbers, it can be profitable in terms of growth, however, when it reached to double digit numbers, it imposes costs and slow down the growth. In a study conducted for Brasil, Faria and Carneiro (2001) reached to the conclusion that inflation may have real effects on the output in the short term, but it doesn't have any real effects in the long term. In a study conducted for Bangladesh, India, Pakistan and Sri Lanka, Malik and Chowdury (2001) reached to the conclusion that there is a long-term positive relationshipbetweeninflation and growth rate, and moderate inflation may have positive effects on growth. Gokal and Hanif (2004) concluded that there is a weak and negative correlation betweeninflation and growth. According to McCandless and Weber(1995) while there is a high correlation between money supply and inflation, there is no correlation between money supply and growth and there is no correlation betweeninflation and growth. Paper of Rolnick and Weber(1998) finds that a high correlation between money growth and inflation.
The optimal lag of one was selected as indicated by lag length selection criterion (Schwarz information criterion, Final prediction error and Hannan-Quinn information criterion). The result of bound test for cointegration in table 1, indicates that null hypotheses cannot be rejected because the F- statistics(0.655646) is less than upper bound value (4.85) at 5 percent critical value for case III (Unrestricted intercept and no trend) as it is found in M. H. Pesaran, Y. Shin and R.J Smith critical table. Therefore, there is no long run relationshipbetweeninflation, unemployment and real GDP growth rate in Nigeria. Similar study conducted by Fouzeia, et al. (2015) observed that there is no long run relationshipbetween unemployment and Gross Domestic Product (GDP) in Egypt.
The analysis of the relationshipbetween exchange rate and inflation in the economic growth process is often achieved using regression analysis which can be explicitly or implicitly stated based on a theoretical framework of endogenous models (King & Levine, 2004). Thus, the level of impact of exchange rate and inflation on the economic growth of Nigeria is assumed to be influenced by several variables as “y” which represents the official gross domestic product (GDP) and “x” which include among others, inflation (INFLA) and Exchange rate (EXCH) .If these assumptions are right, then a multiple linear regression analysis could be adopted and specified thus;
Barro (1996) analyses the effect of inflation and other variables like fertility, democracy and others on economic growth in different countries for a period of 30 years. He uses system of regression equation in which other determinants of growth are held constant. To estimate the effect inflation on economic growth without looking at the endogeneity problem of inflation, he includes inflation as explanatory variable over each period along with other determinants of economic growth. The result indicates that there is a negative relationshipbetweeninflation and growth with a coefficient of -0.024. One problem arising from the above conclusion is that the regression may not show causation from inflation to growth. Inflation is an endogenous variable that my respond to growth and other variables related to growth. For example an inverse relationshipbetweeninflation and growth may arise if an exogenous falling down of growth rate tended to generate higher inflation rate. He uses instrumental variables like independence of the central bank, lagged inflation and prior colonial status, each these variables are related to inflation, to avoid this problem. The result is statistically significant and strengthens the negative relationshipbetween the inflation and growth. Thus, there is some reason to believe that the relation reflect causation from higher long term inflation to reduced growth. Finally, he concludes that even though the results looks small, the long-term effects on standards of living can be substantial.
This paper investigates the relationshipbetweeninflation and output in the context of an economy facing persistently high inflation and inflation shocks. The authors highlighted various existing theories, stating three possible results of the impact of inflation on growth; negative, positive or none. The authors also cited a number of studies completed by various other authors including Eckstein and Leiderman (1992), Gillman (1993), Smyth (1992, 1994, and 1995) and De Gregorio (1993). By analyzing the data for Brazil, the authors found that inflation does not impact growth in the long-run, but in the short-run there exists a significant negative effect from inflation on output. The authors imposed minimal structure and made use of the idea that inflation shocks can be broken down into permanent and temporary components.
Friedman’s hypothesis regarding the relationshipbetweeninflation, inflation uncertainty and output growth states that full employment policy objective of the government tends to increase the rate of inflation which increases the uncertainty about the future course of inflation. Increase in inflation uncertainty lowers economic efficiency and reduces output growth. There are very few studies for underdeveloped countries particularly for India regarding the relationshipbetweeninflation, inflation uncertainty and output growth. Thornton’s (2006) study regarding the relationshipbetweeninflation and inflation uncertainty in India is univariate in nature and it cannot establish the relationshipbetweeninflation uncertainty and output growth. This study intends use the bivariate GARCH model to find out the relation betweeninflation, inflation uncertainty and output growth simultaneously. In this study we use monthly data of wholesale price index (WPI) and index of industrial production (IIP) of India as the proxies of price and output respectively from 1950:1 to 2011:12. Following Fountas, Karanasos and Kim (2002) we have used the following bivariate GARCH model to estimate simultaneously the means, variances and covariances of inflation and output growth. We use Granger- causality test to know the statistical relationshipbetween average inflation, output growth, inflation uncertainty and output growth uncertainty. We find strong evidence that increase in average inflation raises inflation uncertainty and increase in growth rate increases the growth rate uncertainty. But we do not find any statistically significant relationshipbetweeninflation uncertainty and output growth rate.