Inflation Dynamics and Economic Growth
Summary
Inflation dynamics and economic growth are intimately linked through complex feedback mechanisms. Moderate inflation can stimulate investment by reducing real debt burdens and encouraging consumption, whereas high or volatile inflation erodes purchasing power, deters long-term planning and undermines financial stability. Research has identified nonlinearities such that growth responds positively to inflation up to a threshold, beyond which further price rises impede productivity and innovation. Macro-financial linkages, including exchange-rate pass-through, sectoral output shifts and monetary-fiscal interactions, shape this relationship. Moreover, structural features—such as menu costs, wage rigidities and the role of creative destruction—alter the growth-inflation trade-off. Recent analytical frameworks integrate endogenous growth theory with sticky-price models to determine optimal inflation targets, while empirical studies across diverse regions employ time-series and panel techniques to map short-run shocks and long-run equilibria. Understanding these dynamics is crucial for central banks aiming to foster sustainable expansion without triggering damaging price spirals, and for policymakers seeking to balance fiscal stimulus with price stability in an increasingly interconnected global economy.
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Inflation Dynamics and Economic Growth publication trend
The graph below shows the total number of articles in inflation dynamics and economic growth across all publications each year (not limited to Nature Index journals).
Technical terms
ARDL model: A regression framework capturing long-run and short-run dynamics between variables by combining autoregressive lags and distributed lags of explanatory factors.
Co-integration: A statistical property indicating a stable long-term equilibrium relationship between non-stationary time series.
Granger causality: A method to test whether past values of one variable improve the prediction of another, implying directional influence.
Threshold effect: A nonlinear phenomenon where the impact of inflation on growth changes once inflation crosses a specific rate.
Central bank digital currency (CBDC): A digital form of sovereign money issued by a monetary authority, facilitating electronic payments and policy transmission.
References
- Inflation, exchange rate, and economic growth in Ethiopia: A time series analysis. International Review of Economics & Finance (2024).
- Central bank digital currency, economic growth and inflation. Journal of Money and Business (2024).
- The optimal inflation rate under Schumpeterian growth. Journal of Monetary Economics (2018).
- Exchange Rate Volatility, Inflation and Economic Growth in Developing Countries: Panel Data Approach for SADC. Economies (2022).
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