Economics is the study of relationship between inflation

economics is the study of relationship between inflation

relationship between inflation and long-run growth is linear; non-linear; casual or and empirical studies to assess the effect of inflation on economic growth. By O. Selçuk Emsen, Suleyman Arif Turan and Hayati Aksu; Abstract: In this study , the relationship between inflation and economic growth is investigated. objective of this study is to investigate the relationship between inflation and is a negative relationship between economic growth and inflation. This study.


My dissertation was on the impact of bank and stock market development on economic growth in both developed and less-developed countries. After I completed my studies, I did an internship in the city of Turin, Italy, in the area of corporate social responsibility CSR and entrepreneurship. During my internship, I broadened my knowledge as well as my verbal communication and marketing skills. My writing skills were also enhanced as I wrote an e-book about CSR.

The areas that I specialise in are mainly economics, finance, mathematics, statistics, marketing, social issues and entrepreneurship. The relationship between inflation and economic growth GDP: In economics, inflation is defined as the increase in the level of prices and economic growth and is usually defined as the Gross Domestic Product GDP. An increase in inflation means that prices have risen. With an increase in inflation, there is a decline in the purchasing power of money, which reduces consumption and therefore GDP decreases.

High inflation can make investments less desirable, since it creates uncertainty for the future and it can also affect the balance of payments because exports become more expensive. As a result, GDP is decreases further. So it appears that GDP is negatively related to inflation.

However, there are studies indicating that there may also be a positive relationship. The Phillips curve, for example, shows that high inflation is consistent with low rates of unemployment, implying that there is a positive impact on economic growth.

The paper is organised as follows: Some of them are briefly discussed here. Fischer showed that inflation and growth are negatively related. More specifically, he argues that growth, investments and productivity are negatively related to inflation and that capital accumulation and productivity growth are also negatively affected by budget deficits. Moreover, he states that some exceptional cases show that even though high growth is not necessarily associated with low inflation and small budget deficits, high rates of inflation are not consistent with permanent growth.

Barro examined data for almost countries for the period between and and found that the impact of inflation on growth and investment is significantly negative, given that a number of countries characteristics are constant.

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An average increase in inflation of ten per cent leads to a decrease of GDP and investment by 0. He also showed that even if inflation has a small impact on growth, this appears to be significant in the long run.

Bruno and Easterly examined the relationship between inflation and economic growth and they found that this relationship exists only if there are high inflation rates. To determine the high rates of inflation, they set a threshold of 40 per cent. Above this threshold, inflation has a temporally negative impact on growth, whereas below this threshold, they found no robust relationship. The decrease in growth is temporary because after a high inflation crisis, the economy quickly recovers to its previous level.

Their results are robust after controlling for other factors such as external shocks. In addition, the long-run causality is running from inflation to real growth of non-oil GDP. The impulse responses test points out that future responsiveness of growth due to impulse of inflation is negative and significant after a year and a half. Whereas, the inflation responsiveness due to a shock in growth is effective positively after three years and a half in the future.

The Review of Empirical Literature 3.

The Model, Estimation and Discussions 3. The Threshold Model 3. The Unit Root Test 3. The Threshold Estimate 4.

economics is the study of relationship between inflation

Conclusion and Policy Implications Appendix References 1. Introduction The objectives of macroeconomic policies in any country, as well as Saudi Arabia are, to maintain levels of economic growth coupled with low rates of inflation.

Applying fiscal policy with the goal of productivity growth, and monetary policy with the stability of price endeavor, should be implemented and executed well. There has been a tremendous debate on the existence and the nature of the correlation between inflation and growth.

Some economists view low inflation is positively related to economic growth. In the classical theory, growth depends on capital and labor, factors in the standard classical production function.

In order to achieve economic growth, either capital or labor has to rise. So, Growth is determined by saving accumulation, through the negative relationship between interest rate and saving accumulation and hence, investment.

Since money is neutral, no long-run effect on output rather than on prices. In the Keynesian view full employment is neglected, so, expansionary fiscal policy leads to an increase in output and prices. Thus, economic growth and inflation have a stable long-run positive relationship. The rigidity of wages and prices cause longer time to the economy to reach equilibrium. Despite this view, moderate inflation stimulates economic growth.

Other economists argue that, given rational expectations and inflationary spiral, gradual increase in price levels can be transformed into high price levels and macroeconomic uncertainty stems, and will be harmful for economic growth. Monetarists, on the other hand, argue that there is a positive short-run relationship between inflation and economic growth, because of the decline in unemployment.

However, this is true if the policy raising aggregate demand is not anticipated. However, new classical approach stresses that unexpected increase in prices or wages will surprise suppliers of labor and goods, and will have a real impact on the economy in the short-run until agents adjust their expectations. Hence, expected increase in money supply will not affect the economy. Nevertheless, new Keynesians, stress that the rise in inflation will have a negative impact on economic growth.

Low and stable inflation causes economic growth and fair distribution of income. Furthermore, no consensus about the nature of inflation and economic growth. First, Sidrauski [ 22 ], predicts that there is no effect of inflation on growth.

economics is the study of relationship between inflation

Hence, money is super neutral. Secondly, Tobin [ 24 ], assumes that money is a substitute for capital causing inflation to has a positive effect on long-run output and growth. Growth rate of inflation and growth rate of real non-oil GDP. Thirdly, Stockman [ 23 ], puts forward cash-in-advance model in which money is complementary to capital, causing a negative effect on long-run growth. Fourth, new models in which inflation has a negative effect on long-run growth, but only if inflation exceeds certain threshold level.

The purpose of this paper, is to examine theoretically and empirically the existence of coherent meaningful relationship between inflation and economic growth in the Saudi economy, using co-integration methodology. The analysis covers the period of Test for the threshold level of inflation is implemented.

Figure 1 shows true plot of growth rate of inflation and the growth in non-oil GDP.

The relationship between inflation and economic growth (GDP): an empirical analysis

This paper is organized as follows. Section 1 is the introduction.

economics is the study of relationship between inflation

Section 2 reviews the empirical studies on inflation and economic growth. Section 3 deals with the theoretical model and methodology, and discusses the empirical results and their meaningful interpretations. Section 4 provides the conclusion and the policy implications. The, appendix is in section 5.

The Review of Empirical Literature The relationship between inflation and economic growth is one of the most controversial issues in the field of economics.

Economists and experts from different schools of thoughts, whether they are policy makers, or central banking officials everywhere, not yet reached a conclusive evidence concerning the impact of inflation on growth. The main issue is, whether inflation necessary for economic growth or it is detrimental to growth, and what threshold is to keep necessary growth. It is widely believed that moderate and stable inflation rates promote the development process of a country and hence, economic growth.

Moderate inflation supplements return to savers, enhances investment and therefore, accelerates economic growth.

economics is the study of relationship between inflation

The suitable level of economic growth and thus the acceptable level of inflation is somewhere in the middle. Mild inflation might benefit the economy, whereas no inflation is harmful to the economic sectors.

Empirical studies are inconclusive yet regarding the impact of inflation on economic growth. Cooley and Hansen [ 4 ], postulate that there exists positive correlation between marginal product of capital and the quantity of labor. If inflation rises then labor declines and, hence decline in return on capital.

They concluded that inflation rise causes permanent decline in the output. Khan and Sendhadji [ 14 ], examined the relationship between high and low inflation with economic growth. They suggested threshold inflation level for both industrial and developing countries.

Their work involved using panel data for countries for the period of Their findings confirm the threshold beyond which inflation exerts negative effect on economic growth. The threshold estimates are percent and percent for industrialized and developing countries respectively.

Barro [ 2 ], used data for countries in order to assess the effect of inflation on economic growth. Other things being equal, a 10 percent rise in inflation per year leads to a reduction of growth rate by 0. Although the adverse effect looks small, but long-run effects on standards of living are substantial.