IDEAS home Printed from https://ideas.repec.org/a/sbp/journl/67.html
   My bibliography  Save this article

Threshold Inflation in Pakistan

Author

Listed:
  • Muhammad Farooq Arby

    () (State Bank of Pakistan)

  • Amjad Ali

    () (State Bank of Pakistan)

Abstract

Inflation is usually considered to have a non-linear relationship with economic growth: a positive relationship when inflation is low and a negative one when it is high. It is, therefore, an important research question: what is the threshold level of inflation beyond which it affects growth negatively. This paper addresses the question for the case of Pakistan. We have used two models: a quadratic model, and a regression kink model with unknown threshold for the period from 1976 to 2017, and found the threshold inflation rate for Pakistan around 6 percent. It has also been observed that, on average, one percentage point increase in inflation is associated with 0.74 percentage point increase in real GDP growth in Pakistan when inflation is below threshold level; and 0.53 percentage point decrease in real GDP growth, when inflation is above threshold level.

Suggested Citation

  • Muhammad Farooq Arby & Amjad Ali, 2017. "Threshold Inflation in Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 13, pages 1-19.
  • Handle: RePEc:sbp:journl:67
    as

    Download full text from publisher

    File URL: http://www.sbp.org.pk/research/bulletin/2017/Vol-13.1/Paper-01-2017.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Filippo Altissimo & Michael Ehrmann & Frank Smets, 2006. "Inflation persistence and price-setting behaviour in the euro area – a summary of the IPN evidence," Occasional Paper Series 46, European Central Bank.
    2. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    3. Charemza, Wojciech & Makarova, Svetlana, 2009. "Nonlinear Inflationary Persistence and Growth: Theory and Empirical Comparative Analysis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 6(2), pages 5-22, June.
    4. Gerard O'Reilly & Karl Whelan, 2005. "Has Euro-Area Inflation Persistence Changed Over Time?," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 709-720, November.
    5. James P Walsh, 2011. "Reconsidering the Role of Food Prices in Inflation," IMF Working Papers 11/71, International Monetary Fund.
    6. Ignazio Angeloni & Luc Aucremanne & Michael Ehrmann & Jordi Galí & Andrew Levin & Frank Smets, 2006. "New Evidence on Inflation Persistence and Price Stickiness in the Euro Area: Implications for Macro Modeling," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 562-574, 04-05.
    7. Stephen G. Cecchetti & Guy Debelle, 2006. "Has the inflation process changed?," Economic Policy, CEPR;CES;MSH, vol. 21(46), pages 311-352, April.
    8. Choudhary, M. Ali & Faheem, Abdul & Hanif, M. Nadim & Naeem, Saima & Pasha, Farooq, 2016. "Price setting & price stickiness: A developing economy perspective," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 44-61.
    9. Denise R. Osborn & Marianne Sensier, 2009. "Uk Inflation: Persistence, Seasonality And Monetary Policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 56(1), pages 24-44, February.
    10. Pivetta, Frederic & Reis, Ricardo, 2007. "The persistence of inflation in the United States," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1326-1358, April.
    11. Khundrakpam, Jeevan K., 2008. "How Persistent is Indian Inflationary Process, Has it Changed?," MPRA Paper 50927, University Library of Munich, Germany.
    12. Bilke, Laurent, 2005. "Break in the mean and persistence of inflation: a sectoral analysis of French CPI," Working Paper Series 463, European Central Bank.
    13. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
    14. John C. Williams, 2006. "Inflation persistence in an era of well-anchored inflation expectations," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct13.
    15. Zhang, Chengsi, 2011. "Inflation persistence, inflation expectations, and monetary policy in China," Economic Modelling, Elsevier, vol. 28(1-2), pages 622-629, January.
    16. Filippo Altissimo & Michael Ehrmann & Frank Smets, 2006. "Inflation persistence and price-setting behaviour in the euro area : a summary of the Inflation Persistence Network evidence," Working Paper Research 95, National Bank of Belgium.
    17. Carlos Robalo Marques, 2005. "Inflation persistence: facts or artefacts?," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    18. repec:fgv:epgrbe:v:68:n:3:a:6 is not listed on IDEAS
    19. Tianfeng Li & June Wei, 2015. "Multiple Structural Breaks and Inflation Persistence: Evidence from China," Asian Economic Journal, East Asian Economic Association, vol. 29(1), pages 1-20, March.
    20. Nicoletta Batini, 2006. "Euro area inflation persistence," Empirical Economics, Springer, vol. 31(4), pages 977-1002, November.
    21. Hirotugu Akaike, 1969. "Fitting autoregressive models for prediction," Annals of the Institute of Statistical Mathematics, Springer;The Institute of Statistical Mathematics, vol. 21(1), pages 243-247, December.
    22. Batini, Nicoletta, 2002. "Euro area inflation persistence," Working Paper Series 201, European Central Bank.
    23. Oliveira, Fernando Nascimento & Petrassi, Myrian Beatriz Silva, 2014. "Is Inflation Persistence Over?," Revista Brasileira de Economia - RBE, FGV EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 68(3), September.
    24. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    25. Bilke, L., 2005. "Break in the Mean and Persistence of Inflation: a Sectoral Analysis of French CPI," Working papers 122, Banque de France.
    26. Souvik Gupta & Magnus Saxegaard, 2009. "Measures of Underlying Inflation in Sri Lanka," IMF Working Papers 09/167, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Inflation; Threshold Effect; Economic growth.;

    JEL classification:

    • 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
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sbp:journl:67. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Faisal Saleem). General contact details of provider: http://edirc.repec.org/data/sbpgvpk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.