The economic growth and inflation nexus: New empirical assessment for emerging market economies

This paper empirically studies the relationship between economic growth and inflation for a selected group of emerging market economies. We applied panel linear estimators, namely, static fixed effects and a dynamic GMM estimator, to a sample of 31 countries. Our preliminary results indicate that inflation negatively impacts economic growth. We further relaxed the linearity assumption and applied a dynamic threshold GMM model, treating the threshold variable (inflation) and other regressors as endogenous. Our subsequent results indicate that it is reasonable to distinguish between different inflation regimes, as we find a positive impact of inflation on economic growth in the low-inflation regime. In contrast, high inflation negatively affects growth. Thus, we claim that inflation is not harmful to economic growth per se, but it must be considered in the context of the inflation regime/situation in which the economy is operating. We find a threshold of about 2% above which inflation harms the economy.