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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
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    References listed on IDEAS

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    2. Waheed, Irtiza Imran, 2020. "Phillips Curve in Pakistan: A Graphical and Empirical Analysis," MPRA Paper 119097, University Library of Munich, Germany.

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    More about this item

    Keywords

    Inflation; Threshold Effect; Economic growth.;
    All these keywords.

    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

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