Content area
Full Text
This paper examines the issue of the existence of threshold effects in the relationship between inflation rate and growth rate of GDP in the context of Malaysia, using new endogenous threshold autoregressive (TAR) models proposed by Hansen (2000) for estimation and inference. The empirical analysis uses annual data from Malaysia for the period 1970-2005. A specific question addressed in this study was: What is the threshold inflation rate for Malaysia? The findings clearly suggest that one inflation threshold value (i.e., structural break point) exists for Malaysia; and this implies a non-linear relationship between inflation and growth. The estimated threshold regression model suggests 3.89 per cent as the threshold value of inflation rate above which inflation significantly retards growth rate of GDP. In addition, below the threshold level, there is a statistically significant positive relationship between inflation rate and growth. If Bank Negara (Central Bank of Malaysia) pays more attention to the inflation phenomena, then substantial gains can be achieved in low-inflation environment while conducting the new monetary policy.
Keywords: Inflation rate, economic growth, threshold model, structural break, Malaysia.
(ProQuest: ... denotes formulae omitted.)
I. Introduction
The conventional view in macroeconomics holds that low inflation is a necessary condition for fostering economic growth. Although the debate about the precise relationship between inflation and growth remains open, the question of the existence and nature of the link between inflation and economic growth has been the subject of considerable interest and debate. Different schools of thought offer different evidence on this relationship. For example, structuralists believe that inflation is essential for economic growth, whereas the monetarists see inflation as detrimental to economic growth (Mallik and Chowdhury 2001, p. 123). In a seminal paper, Tobin (1965) introduces money into a SolowSwan model as an asset alternative to capital. In this context, inflation increases the opportunity cost of money holdings and thus favours capital accumulation and hence growth. Conversely, in endogenous growth models, the effects of inflation are explained in the works of Gomme (1993) and Jones and Manuelli (1995). For example, where money is introduced in the budget constraint in a model of human capital accumulation, an increase in the rate of inflation negatively affects both consumption and labour supply leading to a lower growth rate. De Gregorio...