SECOND FILE

Title:- Inflation and Economic Growth: Threshold Effects and Transmission Mechanisms

Author :- Minli
ABSTRACT Currently, economists seem to agree that high rates of inflation cause problems, not just for some individuals, but for aggregate economic performance. However, much less agreement exists about the precise relationship between inflation and economic performance, and the mechanism by which inflation affects economic activity. Motivated by these questions, this paper first examines the relationship between inflation and economic performance by using data for 90 developing countries and 28 developed countries over the period 1961-2004. The evidence strongly supports the view that the relationship between inflation and economic growth is nonlinear. Further investigation suggests that developing countries and developed countries show different forms of nonlinearity in the inflation-growth relationship. For developing countries, the data suggest the presence of two thresholds in the function relating economic growth and inflation. The nonlinear mechanism works as follows: at the rates of inflation lower than those of the first threshold, the effects of inflation on growth are insignificant and even positive; at moderate rates of inflation, which are between the two threshold levels, the effects of inflation are significantly and strongly negative; at extremely high rates of inflation, the marginal impact of additional inflation on economic growth diminishes rapidly but is still significantly negative. However, for developed countries, only one threshold is detected and proved significant. The nonlinear mechanism works as follows: the magnitude of the negative effect of inflation on growth declines as the inflation rate increases. The second part of this paper attempts to find the mechanism through which inflation affects long-run economic growth in a nonlinear fashion. Two possible channels, the capital accumulation channel and the Total Factor Productivity (TFP) channel are examined by using a linear model and a model with threshold effects. The interesting finding is that, for both developing and developed countries, the TFP growth, but not the level of investment (Investment/GDP), which is the channel hypothesized by existing theoretical models, is the channel through which inflation adversely and nonlinearly affects economic growth. Moreover, at low to moderate inflation, inflation even has a significantly positive effect on the level of investment. Conclusions The first part of the paper examined the impacts of the inflation rate on economic performance in both developing countries and developed countries, by using the growthexpenditure equation and the growth accounting equation. The results strongly andconsistently supported the existence of a nonlinear relationship between inflation and growth. In addition, developing counties and developed countries show significantly different forms of nonlinearity in the inflation-growth relationship. In particular, for the developing countries, the data suggested that two thresholds exist in the function relating economic growth and inflation. The first threshold level was estimated to be 14 percent, and the second threshold

was estimated to be 38 percent. At the rates of inflation lower than those of the first threshold, the effect of inflation on economic growth is obscure and even positive; at moderate rates of inflation, which are between the two threshold levels, the effect of inflation is significant and strongly negative; at extremely high rates of inflation, the marginal impact of additional inflation on economic growth diminishes rapidly but is still significantly negative. For the developed countries, only one threshold is detected and proved to be significant. This threshold is estimated at 24 percent, which is robust to model specifications and estimation methods. This unique threshold for developed countries works in the same way as the second threshold for the developing countries, that is, at the rates of inflation below this threshold (24%), inflation has a significantly negative effect on economic growth, while the magnitude of this negative effect diminishes dramatically as inflation exceeds this threshold. The existing literature emphasized only one threshold level (beyond which inflation impedes growth, but below which inflation has no significant or even positive effects on growth), whereas this paper detected a second threshold level (above which a large discrete drop in the marginal effects of inflation occurs) for both developed and developing countries. In addition, this paper further suggested that developed countries have a different form of nonlinearity from developing countries in the inflation-growth relationship. These findings provide some strong policy implications. For developing counties, first, the marginal negative effect of moderate inflation in the range of 14 to 38 percent is pronounced. An increase in inflation by 10 percentage points per year will reduce economic growth by about 0.2-0.4 percentage points. This adverse influence of moderate inflation on growth will lead to a substantial negative effect on economies in the long term. Second, policymakers should not exert efforts to keep the inflation rate at zero percent since single-digit inflation (below the first threshold of 14%) does not impede and can even stimulate economic performance. Third, hyperinflation does not have hyper-negative effects on economic growth because the marginal impact of hyperinflation is much lower than that of moderate inflation. Empirically, we can observe that reductions in the hyperinflation rate have never had significant effects on economic growth. Therefore, controlling moderate inflation should be the main goal for policymakers in developing countries. Since the developed countries show a different pattern of nonlinearity in the inflation-growth relationship: the magnitude of the negative effect of inflation on growth declines as the inflation rate increases, and even the low level inflation rate has a strong negative effect on economic growth, policymakers in developed countries, unlike those in developing countries, should exert efforts to keep the inflation rate at zero percent since a small amount of increase in inflation will cause a significant reduction in economic growth. This finding, to some extent, supports the inflation-targeting monetary policy adopted by New Zealand, Canada, the United Kingdom, and some other countries. The second part of this paper attempted to find the mechanism through which inflation affects long-run economic growth in a nonlinear fashion. Two possible channels, the level of investment and the efficiency of investment, were examined by using the linear model and the model with threshold effects. The interesting finding is that, for both developing and developed countries, the TFP growth, but not the level of investment (Investment/GDP), which is the channel, hypothesized by existing theoretical models, is the channel through which inflation adversely and nonlinearly affects economic growth.

Moreover, at low to moderate inflation, specifically, below 65% for developing countries and below 42% for developed countries, inflation even has a significantly positive effect on the level of investment. Most existing studies emphasize the transmission role of the level of investment (capital accumulation) between inflation and long-run economic growth. However, few studies deal with the impact of inflation on the efficiency of investment (the TFP growth) and its transmission role in the inflation-growth relationship. Thus, one of this paper s contributions is to detect that the TFP growth is an important channel, actually the only channel for developed countries, through which inflation affects long-run economic growth in a nonlinear fashion. Possible Future Research on the Second Topic The finding of a positive correlation between inflation and the level of investment is inconsistent with theoretical models and Barro (1995) s finding that an increase in average inflation by 10 percentage points per year results in a decrease in the ratio of investment to GDP by 0.4-0.6 percentage points. Therefore, further research might concentrate on the issue of the sluggish response of investment to inflation in attempt to reconcile the mixed empirical findings. Time series analysis techniques can be used to examine the nature of the statistical causality between the level of capital accumulation, inflation, and economic growth. In particular, multivariate vector-autoregressive (VAR), which allows for dynamic interactions among these variables, could be a good choice for examining the long-term cumulative effects of inflation on the level of capital accumulation. Since the long-term effect of inflation might be completely different from the short-term contemporaneous effects, some interesting findings might be found. Our baseline VAR in levels takes the forms as follows:

where Inflation , Inv and Growth are defined as the same as in previous sections, and k is the lag order as selected by Schwarz s Bayesian Criterion (SBC) and Akaike Information Criterion (AIC). Techniques for time series analysis, such as the Augmented Dickey Fuller (ADF) and Phillips & Perron (PP) tests for testing stationarity (unit roots), the Johansen (1991) test for cointegration, and, if necessary, the Vector Error Correction Model (VECM), will be used to precisely analyze this trivariate VAR model. This VAR framework has the following advantages as compared to the existing cross- sectional and panel data analysis. First, this framework allows for different economic and institutional arrangements in each country. Second, this framework can deal with the simultaneity problem between capital accumulation and economic growth, thus avoiding the difficult task of determining which variables are truly exogenous. Third, this framework allows us to identify not only the short-term effects but also the longterm cumulative effects of inflation on capital accumulation and economic growth by allowing for interactions among these variables, including both the contemporaneous correlation and the dynamic feedback. The third advantage is really important to our analysis since investment might have a sluggish response to inflation, as suggested in the preliminary examinations in Section 5. However, the research to date has not applied the VAR framework to analyze the transmission mechanism between inflation and economic growth. Future analysis will use quarterly data and take a country-by-country approach so that the channels between inflation and growth could be elucidated more clearly than might be possible in a cross- country framework where implicit homogeneity restrictions are usually imposed (Demetriades and Husein, 1996).

THIRD FILE
Title:- INFLATIONARY THRESHOLD EFFECTS IN THE RELATIONSHIP BETWEEN FINANCIAL EVELOPMENT AND ECONOMIC GROWTH: EVIDENCE FROM TAIWAN AND JAPAN Author :- CHIEN-CHIANG LEE AND SWEE YOONG WONG ABSTRACT This paper employs a threshold regression model to investigate the existence of inflation threshold effects in the relationship between financial development and economic growth. A specific question that is addressed in this paper is what the threshold inflation rates are for Taiwan and Japan. Results indicate that there is one inflation threshold value in Taiwan, whereas there are two in Japan. Earlier studies support the view that financial development may promote economic growth. However, the conclusion drawn from the empirical findings suggests that it can only be achieved under low and moderate inflation. In addition, the threshold level of inflation below which financial development significantly promotes growth is estimated at 7.25% for Taiwan and 9.66% for Japan. The empirical findings from the threshold regression model indicate that inflationary threshold for both countries occurred in the high inflation period of the world energy crises in the 70s. Conclusions According to the theoretical studies of Huybens and Smith (1999), Gylfason and Herbertsson (2001), and Bose (2002), inflation will affect real economic activities through its impact on the financial market. De Gregorior and Guidotti (1995) also produced similar results for Latin American countries. That is, when Latin America countries underwent high inflation rate in the 1970s and 1980s, financial development retarded economic growth. The aim of this study is to broaden the empirical literature on the relationship between inflation, financial development, and economic growth by investigating the

relationship among these three variables for Taiwan and Japan. Toward this regard, we employed the TAR approach introduced by Tong (1978) and Hansen (1996) to investigate the possible inflationary threshold effects in the relationship between financial development and economic growth. The empirical findings of this study show that there is one inflation threshold value in Taiwan, whereas there are two in Japan. By treating the annual growth rate of inflation as the threshold variable and exploring the effects of financial development on economic growth under different inflation regimes, the estimation results suggest that when the threshold level of inflation is below 7.25%, financial development may promote economic growth for Taiwan. However, when inflation is higher than 7.25%, financial development will not generate any significant impact on economic growth. Consequently, financial development that promotes economic growth can only be established under low inflation. As for Japan, The empirical results suggest that when the threshold level of inflation is below 9.66%, financial development has a significantly profound impact on economic growth. However, financial development is detrimental to economic growth when inflation is above the threshold level. As a result, the conclusion that financial development may promote economic growth can be established only when Japan s inflation rate is low or moderate. This conclusion is consistent with the findings of Huybens and Smith (1999), Bose (2002), and Rousseau and Wachtel (2002). The estimated results obtain in this study suggest that inflationary threshold indeed exists in the relationship between financial development and economic growth in Taiwan and Japan. This implies that changes in inflation contribute one of the factors that cause structural change in the relationship between financial development and economic growth. Therefore, this structural change due to the existence of inflationary threshold should be taken into account when constructing estimation and prediction models of economic growth for Taiwan and Japan. Furthermore, the policy implication derived from this study is that before policymakers adopt any policy to promote or accelerate financial development, the role of inflation should not be neglected in the relationship between financial development and economic growth; otherwise, such a policy may be detrimental to economic growth.

FIFTH FILE
Title:- RELATIONSHIP BETWEEN INFLATION AND ECONOMIC GROWTH Author Name:- Vikesh Gokal and Subrina Hanif Abstract Like many countries, industrialised and developing, one of the most fundamental objectives of macroeconomic policies in Fiji is to sustain high economic growth together with low inflation. However, there has been considerable debate on the nature of the inflation and growth relationship. In this paper, we have reviewed several different economic theories to ascertain consensus on the inflation growth relationship. Classical economics recalls supply-side theories, which emphasise the need for incentives to save and invest if the nation's economy is to grow. Keynesian theory provided the AD-AS framework, a more comprehensive model for linking inflation to growth. Monetarism reemphasised the critical role of monetary growth in determining inflation, while Neoclassical and Endogenous Growth theories sought to account for the effects of inflation on growth through its impact on investment and capital accumulation. The paper also reviews recent empirical literature. This includes studies by Sarel (1996), Andres &

Hernando (1997) and Ghosh & Phillips (1998) and Khan & Senhadji (2001) amongst others. Ultimately, we tested whether a meaningful relationship held in Fiji s case. The tests revealed that a weak negative correlation exists between inflation and growth, while the change in output gap bears significant bearing. The causality between the two variables ran one-way from GDP growth to inflation. Conclusions The objective of this paper was to determine whether a significant connection between inflation and economic growth exists, according to theory and empirical literature. The literature survey provided some useful insights into the effects of inflation on growth, including the magnitude. In Michael Sarel s paper (1996), he found a structural break at 8 percent, where after inflation impacted negatively on growth. Khan and Senhadji (2001) found that the threshold inflation levels for industrial and developing countries at 1-3 percent and 11-12 percent respectively. These results amongst others provide useful insights into the relationship between the two variables and to determine the advantages of maintaining price stability. Looking specifically at Fiji s economic and inflation performance, the less than robust link between the two variables is not surprising, given the current structure of the economy and factors which influence inflation. Correlation coefficients showed only a weak negative link, while causality was shown to run from economic growth to inflation. With the majority of Fiji s inflation being imported, the influence of domestic factors (being unit labour costs and to a lesser extent the output gap) is limited. The findings of other empirical studies, however, provide some guidance for Fiji policymakers on the importance of maintaining low inflation, in order to foster higher economic growth. For its part, the Reserve Bank of Fiji will need to maintain monetary policy consistent with low inflation and inflation expectations.

NINE FILE
Title:-Inflation and Economic Growth in India An Empirical Analysis Author Name :- Prasanna V Salian1, Gopakumar. K2 Abstract This paper seeks to examine the relationship between inflation and GDP growth in India. An empirical evidence is obtained from the cointegration and error correction models using annual data collected from the Reserve Bank of India. The result shows that there is a long-run negative relationship between inflation and GDP growth rate in India. Inflation is harmful rather than helpful to growth. These results have important policy implications.

Conclusions This study has been motivated by the recent developments in the literature on the relationshipbetween inflation and growth and the apparent contradictory evidence provided for the developed and developing economies. In this paper, the cointegration and error correction models have used to empirically examine long-run and short-run dynamics of the inflation-economic growth relationship in India using annual data. The main objective was to examine whether a relationship exists between economic growth and inflation and, if so, its nature. The interesting results found in this exercise is that the, inflation and economic growth are negatively related. Second, the sensitivity of inflation to changes in growth rates is larger than that of growth to changes in inflation rates. These findings

have important policy implications. In this study, the inflation-growth nexus in India has been systematically analyzed. The important conclusion is that any increase in inflation from the previous period negatively affects growth. Therefore, unlike in the case of the EMU area, the most desired policy for India is the one in which there is always a downward pressure on inflation, without having to worry about what is the threshold level. Further, the policymakers should note that any increase in inflation from the previous period at any level has negative effect on economic growth. However, the fact that the common people and the decision makers do not like inflation has enormous effects on the consumption pattern, which in turn affects the output demanded. Macroeconomic stability and the necessary infrastructure are among the preconditions for sustained growth. Among the ways inflation can affect growth, an important avenue is the effect of inflation on investment. Low or moderate inflation is an indicator of macroeconomic stability and creates an environment conducive for investment. A review of the existing cross-country international evidence, as well as evidence from Asia, indicates a negative relationship between inflation and long-term growth. Countries with low or moderate rates of inflation have higher growth rates over the long-term compared with countries with high inflation rates. However, low inflation does not constitute a sufficient condition for growth. The Indian experience appears to support the above view. In India inflation has generally been kept under control. There have been two episodes of high inflation since 1980 but price rise has been controlled by various fiscal, monetary and administrative measures. Also, evidence from investment behaviour in private manufacturing suggests that an increase in the rate of inflation has a negative impact on private investment in manufacturing. The regression for private investment in agriculture points towards complementarities between public and private investment. Taking economy-wide linkages into account, the analysis suggests that higher growth can be achieved by controlling inflation and raising public investment. To promote growth and keep inflation low, the government needs to control budget deficits. While simulations indicate that this can be achieved by switching public expenditure from consumption to investment, this may be a difficult policy to pursue, especially in a developing country with a multiparty democracy. It may be more realistic to choose tolerable levels of inflation rate and achieve the maximum possible growth given that rate, by deficit-financed public investment. The model allows the policy maker to see the various trade-offs involved. The overall message is clear the government should curtail unproductive expenditure, which is bad for both growth and inflation, in favour of investment. Providing stability and the necessary infrastructure can set the stage for the use of other more direct policy measures aimed at promoting growth.

TEN FILE
Title:- INFLATION AND ECONOMIC GROWTH: EVIDENCE FROM FOUR SOUTH ASIAN COUNTRIES Author Name :- Girijasankar Mallik and Anis Chowdhury Abstract This paper seeks to examine the relationship between inflation and GDP growth for four South Asian countries (Bangladesh, India, Pakistan and Sri Lanka). A comparison of empirical evidence is obtained

from the cointegration and error correction models using annual data collected from the IMF International Financial Statistics. The authors find evidence of a long-run positive relationship between GDP growth rate and inflation for all four countries. There are also significant feedbacks between inflation and economic growth. These results have important policy implications. Moderate inflation is helpful to growth, but faster economic growth feeds back into inflation. Thus, these countries are on a knife-edge. Conclusions In this paper, the authors used cointegration and error correction models to empirically examine longrun and short-run dynamics of the inflation-economic growth relationship for four South Asian countries using annual data. The main objective was to examine whether a relationship exists between economic growth and inflation and, if so, its nature. In addition to significant feedbacks between inflation and economic growth, the authors found two interesting results. First, inflation and economic growth are positively related. Second, the sensitivity of inflation to changes in growth rates is larger than that of growth to changes in inflation rates. These findings have important policy implications. Contrary to the policy advice of the international lending agencies, attempts to reduce inflation to a very low level (or zero) are likely to adversely affect economic growth. However, attempts to achieve faster economic growth may overheat the economy to the extent that the inflation rate becomes unstable. Thus, these economies are on a knife-edge. The challenge for them is to find a growth rate which is consistent with a stable inflation rate, rather than beat inflation first to take them to a path of faster economic growth. They need inflation for growth, but too fast a growth rate may accelerate the inflation rate and take them downhill as found by Bruno and Easterly (1998).

13 FILE
Title:- Inflation and Economic Growth in Bangladesh: 1981-2005 Author Name:- Shamim Ahmed and Md. Golam Mortaza Abstract 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 of the country. This paper empirically explores the present relationship between inflation and economic growth in the context of Bangladesh. Using annual data set on real GDP and CPI for the period of 1980 to 2005, an assessment of empirical evidence has been acquired through the co-integration and error correction models. Further, it explores an interesting policy issue of what is the threshold level of inflation for the economy. The empirical evidence demonstrates that there exists a statistically significant long-run negative relationship between inflation and economic growth for the country as indicated by a statistically significant long-run negative relationship between CPI and real GDP. In addition, the estimated threshold model suggests 6-percent as the threshold level (i.e., structural break point) of inflation above which inflation adversely affects economic growth. These results have important policy implications for both domestic policy makers and the development partners working for the country. Specifically, our conclusion is of direct relevance to the conduct of the monetary policy by the Bangladesh Bank.

Conclusions This paper empirically explores the present relationship between inflation and economic growth in the context of Bangladesh. An assessment of the empirical evidence has been acquired through the cointegration and error correction models. Further, the paper explores an interesting policy issue of what is the threshold level of inflation for the economy. The empirical evidence demonstrates that there exists a statistically significant long-run negative relationship between inflation and economic growth

for the country as indicated by a statistically significant long-run negative relationship between CPI and real GDP. This result is more or less consistent with the predictions of Mallik and Chowdhury (2001). Particularly, they have mentioned that Bangladesh was already on the turning point (i.e., from positive to negative) of inflation-economic growth relationship in the late 1990s. In addition, the estimated threshold model suggests 6-percent threshold level (i.e., structural break point) of inflation above which inflation adversely affects economic growth. These results have important policy implications for both domestic policy makers and the development partners. First, taking into consideration that the inflation rate is not indexed in the wages and salaries, inflation will lead to a decrease in the purchasing power and an increase in the cost of living. Second, given that the country frequently has to balance the credit requirements by the private and public sector against both inflationary and balance of payments pressures, it is not always possible for the monet ary authority to increase (or adjust) the nominal interest rate above the expected (or actual) inflation rate through contractionary monetary policy.11 In this regard, the monetary authority can think of an alternative way by working on the expectations channel to reduce inflation. This requires credibility of the monetary authority in following through its monetary program as communicated in advance to the stakeholders. Some caveats are in order. For example, in the context of Bangladesh, the empirical results provided in this paper do not address the following important issues: 1. It does not estimate how the economic growth rate will behave as the rate of inflation rises, but remaining contained within the threshold level. 2. Does higher inflation lead to greater inflation uncertainty? In particular, what is the relationship between inflation and inflation uncertainty? 3. Whether inflation uncertainty adversely affects economic growth. 4. What are the determinants of high inflationary pressure? Future research should extend in the above directions in order to derive firm policy relevant conclusions