ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Non-linear Relationship between Inflation and Growth in Developing Countries

While the orthodox consensus is that there is no trade-off between inflation and output in the long run, there is no unanimity on the short-run effect of inflation on economic growth. We attempt to estimate the non-linear relationship between inflation and economic growth for 54 developing countries over the 1971-2010 period. Our results suggest a positive association between inflation and gross domestic product growth up to a rough inflation threshold; we did this separately for Asia, Latin America and the Caribbean, and Sub-Saharan Africa. The threshold rate of inflation is found to be 23.5% for Latin America and the Caribbean, approximately 11% for Asia, and 23.6% for Sub-Saharan Africa. These results have important policy implications for developing countries, which often struggle to find the right balance between low inflation and high economic growth.

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