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Modelling the Impact of Inflation on Economic Growth for Countries with Different Levels of Economic Freedom


  • Klachkova, Olga A.

    (Lomonosov Moscow State University)


The article examines the impact of inflation on economic growth for countries with different levels of economic freedom basing on the data collected in 182 countries during the period from 1981 to 2015. The countries are divided into groups through clustering. The estimates obtained in the framework of threshold regression with fixed effects indicate that if a country has high levels of the rule of law, regulatory efficiency, and open markets, the level of government intervention in the economy determines the impact of inflation on economic growth: in the countries with high levels of government intervention the threshold level of inflation is higher (approximately 10%), and its impact is more negative if the threshold is exceeded; in the countries with low levels of government intervention the threshold level is lower (approximately 2%), and the negative impact of inflation is softer if the threshold is exceeded. In the countries with low economic freedom (and with high levels of government intervention) the threshold level is low (approximately 3%), but inflation rates higher than the threshold lead to serious negative consequences.The article also provides a modification of the Solow model of economic growth. Total savings are divided into private and public. Private investors are assumed to be risk-averse, therefore their saving rate and level of investment depends negatively on the level of risk in the economy described by inflation. Public investors are assumed to be risk-neutral. Thus, inflation leads to a sharp decrease in private and a gradual decline in public investment, which leads to lower rates of economic growth depending on the ratio of private and public investors in the economy.

Suggested Citation

  • Klachkova, Olga A., 2017. "Modelling the Impact of Inflation on Economic Growth for Countries with Different Levels of Economic Freedom," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 22-41, October.
  • Handle: RePEc:rnp:ecopol:ep1752

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    References listed on IDEAS

    1. Charles T Carlstrom & Timothy S Fuerst, 2009. "Central Bank Independence And Inflation: A Note," Economic Inquiry, Western Economic Association International, vol. 47(1), pages 182-186, January.
    2. Katharine S. Neiss, 2001. "The markup and inflation: evidence in OECD countries," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 570-587, May.
    3. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, July.
    4. Benjamin Powell, 2003. "Economic Freedom and Growth: The Case of the Celtic Tiger," Cato Journal, Cato Journal, Cato Institute, vol. 22(3), pages 431-448, Winter.
    5. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
    6. Gomes, Orlando, 2006. "Monetary policy and economic growth: combining short and long run macro analysis," MPRA Paper 2849, University Library of Munich, Germany.
    7. Berggren, Niclas, 2003. "The Benefits of Economic Freedom: A Survey," Ratio Working Papers 4, The Ratio Institute.
    8. By Mohsin S. Khan & Abdelhak S. Senhadji, 2001. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 1-1.
    9. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
    10. Fountas, Stilianos, 2010. "Inflation, inflation uncertainty and growth: Are they related?," Economic Modelling, Elsevier, vol. 27(5), pages 896-899, September.
    11. Julio H. Cole, 2003. "The Contribution of Economic Freedom to World Economic Growth: 1980-99," Cato Journal, Cato Journal, Cato Institute, vol. 23(2), pages 189-198, Fall.
    12. Raphael A Espinoza & Ananthakrishnan Prasad & Gene L. Leon, 2010. "Estimating The Inflation–Growth Nexus—A Smooth Transition Model," IMF Working Papers 10/76, International Monetary Fund.
    13. Joseph H. Haslag, 1995. "Inflation and intermediation in a model with endogenous growth," Working Papers 9502, Federal Reserve Bank of Dallas.
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    More about this item


    monetary policy; economic growth; inflation; threshold estimation; threshold regression.;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models


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