Inflation and Economic Growth: A Cross-Country Non-Linear Analysis

Abstract

This paper presents new non-linear regression estimates of the relationship between inflation and economic growth for 80 countries over the period 1961 -2000. We perform tests using the full sample of countries as well as sub-samples consisting of OECD countries, middle-income countries, and low-income countries. We also consider the full sample of countries within the four separate decades between 1961 -2000. Considering our full data set we consistently find that higher inflation is associated with moderate gains in GDP growth up to a roughly 15 -18 percent inflation threshold. However, the findings diverge when we divide our full data set according to income levels. With the OECD countries, no clear pattern emerges at all with either the inflation coefficient or our estimated turning point. With the middle income countries, we return to a consistently positive pattern of inflation coefficients, though none are statistically significant. The turning points range within a narrow band in this sample, between 14 -16 percent. With the low income countries, we obtain positive and higher coefficient values on the inflation coefficient than with the middle-income countries. With the groupings by decade, the results indicate that inflation and growth will be more highly correlated to the degree that macroeconomic policy is focused on demand management as a stimulus to growth. We consider the implications of these findings for the conduct of monetary policy. One is that there is no justification for inflation-targeting policies as they are currently being practiced throughout the middle-and low-income countries, that is, to maintain inflation with a 3 -5 percent band.

Appropriate Threshold Level of Inflation for Economic Growth: Evidence from the Three Founding EAC Countries

“…The empirical evidence demonstrates that there exists a statistically significant long-run negative relationship between these two variables. Pollin and Zhu (2005) presented panel regression estimates from a non-linear model form of quadratic function of the relationship between inflation and economic growth for 80 countries over the period 1961-2000. They found threshold inflation ranges of 14-16% for middle-income countries and 15-23% for low-income countries.…”

“…The model used in this paper follows the Pollin and Zhu (2005) model who utilized a non-linear model form of quadratic function to estimate the threshold level or the turning point above which inflation exerts a negative effect on economic growth. The same approach was used by Patillo et al (2002) and Clements et al (2005) to estimate the non-linear relationship between external debt and growth.…”

Non-linearities in inflation–growth nexus in the SADC region: A panel smooth transition regression approach

“…In addition, a study by Pollin and Zhu (2006) report the existence of a non-linear relationship between inflation and economic growth for 80 countries over the 1961-2000 period, using middle-income and lowincome countries. The paper finds an inflation threshold of between 15 and 18%, above which inflation is detrimental to economic growth and below which inflation is beneficial to economic growth.…”

Implications of New Keynesian Theory for Benchmarking of Monetary Efficiency

“…These trade-offs have been enunciated in the principle of the "trilemma", which predicts countries cannot simultaneously pursue independent monetary and exchange rate policies (see for example, Bleaney, Lee, & Lloyd, 2012;Cohen, 1993;Tavlas, 2003;and McCallum and Nelson (1991). Given ambiguities in relations between investments and inflation (see for example, Ball & Sheridan, 2005;Bernanke et al, 1999;Epstein & Yeldan, 2008;Pollin & Zhu, 2006), a priori an International Journal of Regional Development ISSN 2373-9851 2016 increase in inflation cannot be said to be unequivocally detrimental to investments, economic growth, or economic development.…”