Inflation-growth nexus in developing economies: New empirical evidence from a dis-aggregated approach

This study challenges the traditional way of examining the “inflation–output growth nexus”. Research at the aggregate level yields mostly ambiguous results, we perform a dis-aggregated analysis of output growth and inflation. For each sector—industry, services and agriculture—we consider inflation and the value–added growth in a sample of 113 developing (low and middle income) economies over the period 1974–2013. Empirical investigation reveals that different sectors of the economy respond differently to various impulses of inflation. Specifically, inflation impacts the growth of industrial and services sectors negatively; whereas a growth enhancing relationship has been found for the agriculture sector. We further calculated a threshold level, for each sector, beyond which inflation is harmful to growth. These are 13.48 %, 14.48 %, 15.37 % and 40 % for aggregate GDP, industrial, services and agriculture sectors respectively. This implies that the central banks of developing economies must weigh the varying consequences of its actions on individual sectors bearing in mind each sector's share in the respective economy.