Investment, inflation and economic growth nexus
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 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.
|Date of creation:||21 Apr 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Qaiser Munir & Kasim Mansur, 2009. "Non-Linearity between Inflation Rate and GDP Growth in Malaysia," Economics Bulletin, AccessEcon, vol. 29(3), pages 1555-1569.
- Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
- Bruno, Michael & Easterly, William, 1995.
"Inflation crises and long-run growth,"
Policy Research Working Paper Series
1517, The World Bank.
- Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
- Nelson, Charles R, 1976. "Inflation and Rates of Return on Common Stocks," Journal of Finance, American Finance Association, vol. 31(2), pages 471-83, May.
- Huybens, Elisabeth & Smith, Bruce D., 1999.
"Inflation, financial markets and long-run real activity,"
Journal of Monetary Economics,
Elsevier, vol. 43(2), pages 283-315, April.
- Elisabeth Huybens & Bruce D. Smith, 1997. "Inflation, Financial Markets and Long-Run Real Activity," Working Papers 9707, Centro de Investigacion Economica, ITAM.
- Michael Sarel, 1996. "Nonlinear Effects of Inflation on Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 199-215, March.
- Bruce E. Hansen, 2000.
"Sample Splitting and Threshold Estimation,"
Econometric Society, vol. 68(3), pages 575-604, May.
- Huybens, Elisabeth & Smith, Bruce D., 1998.
"Financial Market Frictions, Monetary Policy, and Capital Accumulation in a Small Open Economy,"
Journal of Economic Theory,
Elsevier, vol. 81(2), pages 353-400, August.
- Elisabeth Huybens & Bruce D. Smith, 1996. "Financial Market Frictions, Monetary Policy and Capital Accumulation in a Small Open Economy," Working Papers 9608, Centro de Investigacion Economica, ITAM.
- Bruce D. Smith & John H. Boyd, 1998. "Capital market imperfections in a monetary growth model," Economic Theory, Springer, vol. 11(2), pages 241-273.
- David, Drukker & Pedro, Gomis-Porqueras & Paula, Hernandez -erme, 2005. "Threshold effects in the relationship between inflation and growth: a new panel-data approach," MPRA Paper 38225, University Library of Munich, Germany.
- João R. Faria & Francisco Galrão Carneiro, 2001. "Does High Inflation Affect Growth in the Long and Short Run?," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 89-105, May.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:27163. 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: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.