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

Authors

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

Keywords:

Developing Economies, Economic Growth, Inflation

Abstract

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.

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Published

2023-06-30

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 http://pjss.bzu.edu.pk/index.php/pjss/article/view/1309