The Dynamics of Inflation-Growth Nexus: Empirical Evidence from Small-Sample Panel Data


  • Muhammad Ayyoub Assistant Professor, Department of Economics, University of Sahiwal, Pakistan
  • Aisha Riaz Lecturer, Department of Management Sciences, University of Okara, Pakistan


Developing Economies, Economic Growth, Inflation


The conventional understanding that inflation and economic growth have an inverse relationship is not fully supported by empirical evidence. In contrast to this, we show that the growth of key sectors in a number of low-income developing economies is robustly associated with higher inflation. Hence, employing a blanket rule that assumes a ‘negative inflation-growth relationship’ for all sectors of the economy may lead to deceptive interpretations. The takeoff point of this study is the companion paper by Ayyoub and Woerz (2016). By utilizing a panel dataset consisting of 10 developing economies with low-income status, spanning the years 1981 to 2015, we have uncovered a negative relationship between inflation and economic growth when the share of value-added output contributed by the agricultural sector surges beyond a critical threshold of 50 percent. The results of our study reveal that the impact of inflation varies significantly across sectors, thus validating the argument that inflation-growth dynamics in low-income African countries and Nepal are specific to their respective regions. Therefore, when analyzing the transmission mechanism of monetary policy, it is essential for central bankers in these economies to give particular consideration to the differing sectoral-growth-dynamics.


Aisen, A., & Veiga, F. J. (2013). How does political instability affect economic growth? European Journal of Political Economy, 29(1), 151–167. doi:10.1016/j.ejpoleco.2012.11.001.

Arai, M., Kinnwall, M., & Thoursie, P. S. (2004). Cyclical and causal patterns of inflation and GDP growth. Applied Economics, 36(15), 1705–1715.

Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2), 277–297. doi:10.2307/2297968.

Ayyoub, M., & Woerz, J. (2016). Long-run inflation-growth nexus in developing economies: Old wine in a new bottle. Journal of Business & Economics, 8(2), 114–127.

Ayyoub, M., & Wörz, J. (2021). Inflation?growth nexus in developing economies: New empirical evidence from a disaggregated approach. International Journal of Finance & Economics, 26(1), 241-257. doi: 10.1002/ijfe.1787.

Barro, R. J. (1995). Inflation and economic growth. Bank of England Quarterly Bulletin, (pp. 166–176).

Barro, R. J., & Sala-i-Martin, X. (1995). Economic Growth. New York: McGraw-Hill.

Binici, M., Cheung, Y.-W., & Lai, K. S. (2012). Trade openness, market competition, and inflation: Some sectoral evidence from OECD countries. International Journal of Finance & Economics, 17(4), 321– 336. doi:10.1002/ijfe.1451.

Bittencourt, M., Eyden, R., & Seleteng, M. (2015). Inflation and economic growth: Evidence from the Southern African Development Community. South African Journal of Economics, 83(3), 411–424. doi:10.1111/saje.12075.

Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. doi:10.1016/S0304-4076(98)00009-8.

Boyd, J. H., Levine, R., & Smith, B. D. (2001). The impact of inflation on financial sector performance. Journal of Monetary Economics, 47(2), 221–248. doi:10.1016/S0304-3932(01)00049-6.

Bruno, G. S. (2005a). Approximating the bias of the LSDV estimator for dynamic unbalanced panel data models. Economics Letters, 87(3), 361–366. doi:10.1016/j.econlet.2005.01.005.

Bruno, G. S. (2005b). Estimation and inference in dynamic unbalanced panel data models with a small number of individuals. The Stata Journal, 5(4), 473–500.

Bun, M. J., & Kiviet, J. F. (2003). On the diminishing returns of higher-order terms in asymptotic expansions of bias. Economics Letters, 79(2), 145–152. doi:10.1016/S0165-1765(02)00299-9.

David, D., Pere, G.-P., & Paula, H.-V. (2005). Threshold effects in the relationship between inflation and growth: A new panel-data approach. MPRA Paper No. 38225, Munich Personal RePEc Archive.

Dornbusch, R. (1996). Commentary: How should central banks reduce inflation? —Conceptual issues. In: Achieving Price Stability, (pp. 93–103).

Easterly, W., & Levine, R. (1997). Africa’s growth tragedy: policies and ethnic divisions. Quarterly Journal of Economics, 112(4), 1203–1250.

Ferraro, D., & Peretto, P. F. (2017). Commodity prices and growth. The Economic Journal, 128(616), 3242-3265. doi:10.1111/ecoj.12559.

Foley, D. K., & Sidrauski, M. (1970). Portfolio choice, investment, and growth. The American Economic Review, 60(1), 44–63.

Foley, D. K., & Sidrauski, M. (1971). Monetary and Fiscal Policy in a Growing Economy. New York: Macmillan.

Gillman, M., & Harris, M. N. (2010). The effect of inflation on growth–Evidence from a panel of transition countries. Economics of Transition, 18(4), 697–714. doi:10.1111/j.1468-0351.2009.00389.x.

Hineline, D. R. (2007). Examining the robustness of the inflation and growth relationship. Southern Economic Journal, 73(4), 1020–1037.

Hineline, D. R. (2010). Long-run impacts of inflation across sectors in a small sample of countries. Applied Economics, 42(10), 1197–1207. doi:10.1080/00036840701721307.

Huo, T.-M. (1997). Inflation and capital accumulation in a two-sector cash-in-advance economy. Journal of Macroeconomics, 19(1), 103–115. doi:10.1016/S0164-0704(97)00006-2.

Iyke, B. N., & Odhiambo, N. M. (2017). Inflationary thresholds, financial development and economic growth: New evidence from two West African countries. Global Economy Journal, 13(1), 1–11.

Judson, R. A., & Owen, A. L. (1999). Estimating dynamic panel data models: A guide for macroeconomists. Economics Letters, 65(1), 9–15.

Karras, G. (1993). Money, inflation, and output growth: Does the aggregate supply aggregate demand model explain the international evidence? Weltwirtschaftliches Archiv, 129(4), 662–674.

Khan, M. S., & Senhadji, A. S. (2001). Threshold effects in the relationship between inflation and growth. IMF Staff Papers, International Monetary Fund, 48(1), 1–21. doi:10.2307/4621658.

Kiviet, J. F. (1995). On bias, inconsistency, and efficiency of various estimators in dynamic panel data models. Journal of Econometrics, 68(1), 53–78.

Kiviet, J. F. et al. (1999). Expectations of expansions for estimators in a dynamic panel data model: Some results for weakly-exogenous regressors. In Hsiao, C., Lahiri, K., Lee, L.-F., Pesaran, M.H. (Eds.), Analysis of Panel Data and Limited Dependent Variables. Cambridge University Press, Cambridge.

Kremer, S., Bick, A., & Nautz, D. (2013). Inflation and growth: New evidence from a dynamic panel threshold analysis. Empirical Economics, 44(2), 861–878. doi:10.1007/ s00181-012-0553-9.

Ndoricimpa, A. (2017). Threshold effects of inflation on economic growth: Is Africa different? International Economic Journal, 31(4), 599-620. doi:10.1080/10168737.2017.1380679.

Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal, 9(1), 86–136. doi:10.1257/jep.8.1.3.

Sargan, J. D. (1958). The estimation of economic relationships using instrumental variables. Econometrica, 26(3), 393–415.

Seleteng, M., Bittencourt, M., & Van Eyden, R. (2013). Non-linearities in inflation–growth nexus in the SADC region: A panel smooth transition regression approach. Economic Modelling, 30(1), 149–156. doi:10.1016/j.econmod.2012.09.028.

Sequeira, T. N., & Macas Nunes, P. (2008). Does tourism influence economic growth? A dynamic panel data approach. Applied Economics, 40(18), 2431–2441. doi:10.1080/00036840600949520.

Walsh, C. E. (1995). Optimal contracts for central bankers. The American Economic Review, 85(1), 150–167.

Wooldridge, J. M. (2010). Econometric Analysis of Cross Section and Panel Data. MIT Press, Cambridge, MA.




How to Cite

Ayyoub , M. ., & Riaz, A. (2023). The Dynamics of Inflation-Growth Nexus: Empirical Evidence from Small-Sample Panel Data. Pakistan Journal of Social Sciences, 43(2), 243-255. Retrieved from