Examine the impact of inflation on economic growth

Abstract

In research and economic management, a comprehensive understanding of the correlation between GDP growth and inflation is of paramount importance. This paper uses the Bayesian model averaging to examine whether the impact of inflation on long-run economic growth is robust to alternative model parameters. The empirical results show that the relationship between inflation and economic growth is non-linear and the optimal inflation rate is 4.07 percent. Inflation below the threshold of 4.07 percent exhibits a positive but statistically insignificant impact on economic growth; inflation above the threshold of 4.07 percent has a negative yet negligible impact on economic growth. The authors’ findings differ from previous findings in eliminating the effects of inflation when instrumental variables are used.