The effect of inflation on Economic growth
Afag Gusseinzade
The issue of inflation effect on economic growth has been thoroughly discussed in the economic literature. However, the empirical efforts to resolve issue of inflation effect on economic growth is still not reached. It is necessary to identify the effect of inflation on economic growth in order to promote better economic growth. The history has shown the negative experience with inflation, therefore the fallowing hypothesis was proposed: The effect of inflation on economic growth is negative.
In the first chapter is given the theoretical overview of the topic. The main theories of inflation effect of growth and the theoretical basis of the subsequent empirical analysis are presented. It can be concluded from the theoretical overview that inflation affects growth negatively. In the first part of the second chapter are described the data and the data analysis methods in the empirical analysis. In the second part of second chapter are presented the results and conclusions of the empirical analysis.
This study revealed that the relationship between the level of inflation and GDP is negative. It can be explained by different methods, such as correlation analysis, trend component of a time series analysis and Fisher model analysis. In the last one the negative effect is present regardless of the level of inflation.
The correlation analysis was based on the selected countries and it showed that the level of inflation and GDP growth have the negative relationship. The correlation coefficients are higher in such countries as USA and Canada, so it is more clearly seen the relationship between two economic phenomena. The data about Europe and Turkey can not be established with certainty, because there is no clear trend.
GDP growth and inflation trend component of a time series analysis confirmed again the negative relationship for all countries that were chosen in this study. The negative relationship was also evident in the small fluctuations where the level of inflation has already been more stable.
Unlike the theoretical perspectives, the Fisher regression analysis showed that higher level of inflation has less negative impact on economic growth. It is necessary to take into account the t-statistics indicators that are higher when the level of inflation is low.
The purpose of this work is to find the effect of inflation on economic growth. So, it was proven that inflation affects growth negatively. It was also found that inflation exerts a greater negative impact if the level is up to 15%. The study showed that controlling inflation is important because it has a deterrent effect on the economy.
LISAD