The Relationship Between Inflation And Economic Growth
1.0 Overview Summary 1.1 Background of the Study
The relationship between inflation and economic growth is a debated topic. According to the Khan and Senhadji (2001), the different level of economic development countries will show the different result of the effects on inflation to economic growth as means that the inflation rate of the developing and undeveloped countries is higher than the developed countries. Besides, the highest the macroeconomic development such as trade openness, public expenditure and capital accumulation bring nonlinearity relationship of inflation to the economic growth. This is because the high volatility of exchange rate and the competition between countries during the trade openness has increased the inflation.
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To identifies several thresholds for the global sample with the various income-specific sub-samples and investigate the relationship of nonlinearity.
II. To examine the characteristic of country-based macroeconomic which affect the nonlinearity.
1.3 Problem Statement/ Issue
The problems on this research will be answer by the following questions:
I. Does the negative impact of inflation on economic growth are able to withstand the level of development of an economy?
II. Does inflation begin to stop long-term growth at which level?
III. What is the characteristic of specific-country that change the direction and intensity of the impact of inflation on economic activity?
2.0 Empirical Findings of Past Studies
The literature review contains the different finding that shows the relationship between inflation and economic growth. The purpose of past studies is used to determine whether the inflation really brings the effect to economic growth.
2.1 The inflation–growth relationship: empirical
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3.2.1 Panel Smooth Transition Regression (PSTR)
PSTR is a model that proposed by the González et al. (2005) to help to examine the nonlinear relationship between the inflation and economic growth. In order to make sure the smoothing changes of the coefficients with respect to the threshold variables and the unstable time change of the inflation-growth coefficients, the PSTR also provides the parametric information to cross-country heterogeneity. The research can accurately assess the effect of inflation on economic growth through the applying of PSTR model.
3.2.2 Generalized Method of Moments (GMM)
The GMM is a model to solve the endogeneity problem which occur in the panel estimation of growth regression (Arellano and Bover, 1995 and Blundell and Bond, 1998). Besides, the effectiveness of the instrument will decide the consistency of the GMM estimator. In this research, the GMM model is used to test the inflation with the different macroeconomic variables such as population growth, investment, trade openness, financial development and public
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