Inflation and Economic Growth in Middle East Countries; A Threshold Panel Approach

Document Type : Research Article

Authors

1 Assistant Professor, Department of Management, Faculty of Management and Accounting, Firoozabad Branch, Islamic Azad University, Firoozabad, Iran

2 Ph.D. in Economics, Department of Economics, Faculty of Social Sciences, Razi University, Kermanshah, Iran

3 Associate Professor, Department of Economics, Faculty of Humanities, Ayatollah Boroujerdi University, Boroujerd, Iran

Abstract

Economists and policymakers worldwide consider economic growth and inflation as crucial macroeconomic variables. The correlation between these two variables has been a captivating topic in recent decades, but the literature lacks clarity on this relationship. Therefore, this study aims to investigate the connection between inflation and economic growth in Middle Eastern countries during the 2000-2021 period using a threshold panel model. The empirical findings suggest that there is a nonlinear relationship between inflation and economic growth in these countries. Specifically, when inflation is below 10.1 percent, it has not a significant impact on economic growth. However, beyond this threshold level of inflation, it has a significant negative impact on economic growth. High inflation as a way of increasing inflation expectations may increase the cost of production and decrease production and economic growth. Furthermore, high inflation leads to high volatility in inflation expectations which increases uncertainty in investment and production. This volatility damages people’s confidence in government policies which may decrease the effectiveness of monetary and fiscal policies in the economy. Moreover, high inflation decreases the competitive power of domestic producers against foreign producers which decreases exports and ultimately leads to decreased economic growth.

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References

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Journal of Applied Economics Studies in Iran
Volume 12, Issue 47
October 2023
Pages 159-179

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