Khan techniques initially developed by Chan and

Khan and
Senhadji (2001) analyzed the inflation and growth relationship separately for
industrial and developing countries. They have used new econometric techniques
initially developed by Chan and Tsay in 1998 and Hansen in 1999 and 2000. The
paper specifically focused on the following questions:

·        
Is
there a statistically significant threshold level of inflation above which
inflation affects growth differently than at a lower rate?

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·        
Is
the threshold effect similar across developing and industrialized country?

·        
Are
these thresholds values statistically different?

·        
How
robust is the Bruno-Easterly finding that the negative relationship between
inflation and growth exists only for high-inflation observations and
high-frequency data?

The data set
included 140 countries (comprising both industrial and developing countries)
and generally covered the period 1960 – 1998. The authors stated that some data
for some developing countries had a shorter span, this is a limitation of the
study. As such, analysis had to be conducted by them using ‘unbalanced panels’.
The data came primarily from the World Economic Outlook (WEO) database, with
the growth rate in GDP recorded in local currencies at constant 1987 prices and
inflation measured by the percentage charge in the CPI index. The empirical
results presented in the paper, strongly suggest the existence of a threshold
beyond which inflation exerts a negative effect on growth. The result indicated
that inflation level below the threshold level of inflation have no effect on
growth. But inflation rates above the threshold level have a significant
negative effect on growth. Inflation levels below the threshold levels of
inflation have no effect on growth, while inflation rates above the threshold
have a significant negative effect on growth.

The authors’
results find out that the threshold is lower for industrialized countries than
it is for developing countries (the estimates are 1-3 percent and 11-12 percent
for industrial and developing countries respectively, depending on the
estimation method used). The thresholds were statistically significant a 1
percent or less, implying that the threshold estimates are very precise. The
negative and significant relationship between inflation and growth above the
threshold level is argued to be robust with respect to type of estimation
method used. The authors suggest that while the results of the paper are
important, some caution should be borne in mind. The estimated relationship
between inflation which inflation affects growth, beyond the fact that, because
investment and unemployment are controlled for, the effect is primarily through
productivity.

Rodrik (2008)
found that there is a relation between exchange rates with economic growth to
form positive relationships. Ito, Isard and Symasnky (1999) found that high
economic growth rates supported by adequate export growth, thus increasing the
value of exchange rates due to increased demand for the national currency.

                                                    

Ghosh and
Phillips (1998) argued that if a relationship exists between inflation and
growth it will not be a simple one. The bivariate relationship may not be
linear; and the correlation between inflation/disinflation and growth maybe
quite different from the steady-state inflation –growth relationship.

They argued
further, that in a multivariate case, the relationship becomes even more
complicated. Their complete data set consists 3603 annual observations on real
per capital GDP growth, and period average consumer price inflation,
corresponding to 145 countries, over the 1960-1996 period. Their primary
analytical tool is a panel regression, in which their main contribution was o
combine a nonlinear treatment of the inflation growth relationship with an
extensive examination of robustness. They check whether the inflation-growth
relationship appears in multivariate regression analysis. The intention was not
to develop an explanatory model of GDP growth, but rather to determine whether
the inflation-growth correlation is robust. Their analysis also checked for nonlinearity
of the inflation-growth relationship.

Ghosh and
Phillips (1998) revealed that there is a negative relationship between
inflation and growth that is statistically significant and of an economically
interesting magnitude. These findings were put through numerous robustness
checks. As an interesting by-product of their studies, the authors developed a
sequential decision “tree” technique in order to prove that inflation is not
only a statistically significant determinant but also one of the most important
determinants of growth. At very low rates of inflation (around 2-3 percent a
year or lower), inflation and growth are positively correlated. If not so,
inflation and growth are negatively correlated, but the relationship is convex,
making the decline in growth associated with an increase from 10 percent to 20
percent inflation is much larger than that associated with moving from 40
percent to 50 percent. Taking both these nonlinearities into account, they find
that the negative inflation-growth relationship is evident in both the time and
cross-section dimensions of the data, and that it is quite robust. The authors
also found a threshold at 2.5 percent, and a significant negative effect above
this level. The negative relation survived all additional robustness check and
tests for endogeneity. Their policy message suggests that even lowering
moderate inflation rates can yield gains in GDP growth of up to 0.8 – 0.9
percentage points.