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Investment, Inflation and Economic Growth Nexus

Author

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  • Nasir Iqbal

    (Pakistan Institute of Development Economics, Islamabad)

  • Saima Nawaz

    (Pakistan Institute of Development Economics, Islamabad)

Abstract

The 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 ma rginal 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.

Suggested Citation

  • Nasir Iqbal & Saima Nawaz, 2009. "Investment, Inflation and Economic Growth Nexus," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 48(4), pages 863-874.
  • Handle: RePEc:pid:journl:v:48:y:2009:i:4:p:863-874
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Limam Ould Mohamed Mahmoud, 2015. "Consumer price index and economic growth: A case study of Mauritania 1990 - 2013," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 5(2), pages 16-23, February.
    2. Samir Ghazouani, 2012. "Threshold Effect of Inflation on Growth: Evidence from MENA Region," Working Papers 715, Economic Research Forum, revised 2012.
    3. Atif Mian & Amir Sufi, 2011. "Household Leverage and the Recession of 2007 to 2009," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 7, pages 125-173.
    4. Ali, Sharafat, 2014. "Inflation, Income Inequality and Economic Growth in Pakistan: A Cointegration Analysis," MPRA Paper 53706, University Library of Munich, Germany.
    5. Muhammad Farooq Arby & Amjad Ali, 2017. "Threshold Inflation in Pakistan," SBP Working Paper Series 94, State Bank of Pakistan, Research Department.
    6. Amjad Ali & Nooreen Mujahid & Yahya Rashid & Muhammad Shahbaz, 2015. "Human Capital Outflow and Economic Misery: Fresh Evidence for Pakistan," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 124(3), pages 747-764, December.
    7. Waseem Khadim & Saddam Ilyas & Bilal Mehmood, 2016. "Of Inflation and Growth Nexus in BRIMC Economies," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 4(1), pages 32-45, January.
    8. Hasanov, Fakhri, 2011. "Relationship between inflation and economic growth in Azerbaijani economy: is there any threshold effect?," MPRA Paper 33494, University Library of Munich, Germany.

    More about this item

    Keywords

    Investment; Inflation; Economic Growth; Nonlinear; Pakistan;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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