Exploring the relationship between inflation and economic growth: a panel data study on South Asia

Abstract

Inflation and economic growth are two very important macroeconomic variables that stir a lot of interest. This paper explores the relationship between inflation and growth for six countries in South Asia, namely Bangladesh, Bhutan, India, Sri Lanka, Nepal and Pakistan. The study consists of panel data techniques like the LLC unit root test, and the fixed effect model to explore the relationship between inflation and growth for the countries in the sample over the time period 2000-2019. The study finds an overall positive relationship between the two variables for the overall sample. However, the country specific effects dissipated through OLS regression shows a positive relationship between inflation and economic growth for Bangladesh, Sri Lanka and Nepal, and a negative relationship for India, Bhutan and Pakistan. The study further finds a significantly negative non-linear relationship for the sample, where the threshold of inflation of is 5.80% and above this rate, inflation can have negative impacts on economic growth and vice versa.