Investment, inflation and economic growth nexus
AbstractThe paper has twofold objectives. Firstly, the impact of the inflation rate on economic growth with the possibility of two threshold levels for Pakistan using annual data from 1961 to 2008 is examined and secondly, nonlinear relationship between inflation and investment has been investigated. Inflation and growth models support the existence of a nonlinear relationship with two thresholds (6 percent and 11 percent). Inflation below the first threshold affects economic growth positively but insignificantly; at moderate rates of inflation, between the two threshold levels, the effect of inflation is significant and strongly negative and at high rates of inflation, above the second threshold, the marginal impact of additional inflation on economic growth diminishes but is still significantly negative. Investment is one of the possible channels through which inflation influences economic growth and the analysis indicates the nonlinear relationship between these two variables with only one threshold at 7 percent. Rate of inflation below the threshold level has positive but insignificant impact, while above the threshold it has strong negative and significant impact on the investment. Therefore, it is desirable to keep the inflation below 6 percent because it may be helpful for the achievement of robust economic growth and investment.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 27163.
Date of creation: 21 Apr 2010
Date of revision:
Investment; Inflation; Nonlinear; Pakistan;
Other versions of this item:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-12-18 (All new papers)
- NEP-FDG-2010-12-18 (Financial Development & Growth)
- NEP-MAC-2010-12-18 (Macroeconomics)
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