The Recent Inflation Crisis and Long-run Economic Growth in India: An Empirical Survey of Threshold Level of Inflation

Abstract

This article investigates the existence of a threshold level of inflation and how any such level affects the growth of Indian economy. The article also seeks to examine the dynamic short-run and long-run relationship between inflation and economic growth in India. By employing spline regression method to estimate the threshold level of inflation and the long-run and short-run relationships, the results show a statistically significant structural break in the relationship between inflation and economic growth at 4 per cent. The study suggests that if inflation exceeds the threshold point, that is, 4 per cent, it will negatively affect economic growth. The autoregressive distributed lag (ARDL) model bound testing cointegration suggests that there are two cointegration vectors when gross domestic product and rate of interest are considered as the dependent variables. This result confirms the existence of the long-run equilibrium relationship between economic growth, inflation, exchange rate and rate of interest. From the long-run analysis, the study found that inflation is positively related to economic growth, whereas the other variables are not significant. JEL Classification: E4, E6

Inflation and Economic Growth in Zimbabwe is there Any Inflation Threshold Level?

“…Conditional least squares econometric results show that low inflation has a positive impact on economic growth and the threshold level of inflation for GDP growth in Zimbabwe is 4 percent. The results of the study are consistent with the findings of Sattarov (2011) who found an optimal inflation rate of 4 per cent for the Finnish economy, Behera and Mishra (2017) who found a threshold level of inflation of 4 per cent in India, Masiyandima et al (2018) who found an optimal level of inflation of 4.6 per cent for the multicurrency regime (2009-2017) and 8.7 per cent for the period 1980 to 1997 in Zimbabwe, Singh (2010) who found a threshold level of inflation for India at 6 per cent, Iqbal and Nawaz (2009) who obtained 6 per cent inflation rate to be growth maximising in Pakistan, Sarel (1996) who found a threshold level of inflation of 8 per cent, Khan and Senhadji (2001) who found a threshold level of inflation for developing countries to be 11 per cent to 12 per cent, Hasanov (2011) who found an optimal inflation rate of 13 per cent for Azerbaijani economy and Ndoricimpa (2017) who found inflation threshold of 6.7 per cent for African countries and 9 per cent for lowincome countries. The study findings also show that lending rate has a negative impact on economic growth, where a 1 per cent increase in lending rate decreases economic growth by 0.0008881 per cent.…”

“…In order to detect the potential non-linear relationship between inflation and economic growth and estimate the threshold level of inflation, the study used the methodology proposed by Khan and Senhadji (2001) and used by Doguwa (2012) in Nigeria, Iqbal and Nawaz (2009) in Pakistan, Hasanov (2011) in Azerbaijani, Makuria (2013) in Ethiopia and Behera and Mishra (2017) in India. In order to determine the threshold level of inflation, the following econometric model was estimated.…”

“…Besides these studies that were primarily interested in the relationship between inflation and economic growth, some studies examined both the relationship and the existence of the threshold inflation level. Different approaches were used to examine the threshold level of inflation including non-linear models, dynamic threshold regression models, conditional least squares, quadratic threshold model and panel smooth transition regression (Behera & Mishra, 2017;Doguwa, 2012;Drukker et al, 2005;Gurgul & Lach, 2014;Hasanov, 2011;Iqbal & Nawaz, 2009;Khan & Senhadji, 2001;Makuria, 2013;Masiyandima et al, 2018;Ndoricimpa, 2017;Sarel, 1996;Sattarov, 2011). While Khan and Senhadji (2001) found a threshold level of inflation of 1-3 per cent for industrial countries and 11-12 per cent for developing countries, Sarel (1996) found a threshold inflation rate of 8 per cent.…”

“…While Thanh (2015) found an inflation threshold level of 7.84 per cent, Gurgul and Lach (2014) found two inflation threshold levels to equal 1.4 per cent and 3.4 per cent for one year-lagged and contemporaneous effects, respectively. In India, Behera and Mishra (2017) found an inflation threshold level of 4 per cent while in Ethiopia, Makuria (2013) found 10 per cent as the optimal level of inflation that facilitate growth. Ndoricimpa (2017) found an inflation threshold of 6.7 per cent for the whole sample of African countries, 9 per cent for the sub-sample of low income countries and 6.5 per cent for middle income countries.…”

Does Financial Permeation Promote Economic Growth? Some Econometric Evidence From Asian Countries

“…Furthermore, we control for inflation rate (LINF i,t ), which is measured by consumer price index (CPI), because many studies found that inflation has influences on countries' economic growth (Adebola & Dahalan, 2011;Behera & Mishra, 2017;Divya & Devi, 2014;Mallik & Chowdhury, 2001). Another control variable we added is the ratio of domestic credit delivered by the financial sector to GDP.…”