Nonlinear Impact of Inflation on Economic Growth in Nepal: A Smooth Transition Regression Approach

Abstract

Economic growth has been a central issue of all governments and therefore numbers of studies have focused on identifying the factors affecting economic growth. This issue is more important in developing countries context that faces additional challenge of maintaining macroeconomic stability. In other words, the challenge they normally faced is attaining high and consistent production growth with low inflation. Keynesian concept of macroeconomic stability advocates maintaining external and internal balance with low inflation in order to achieve full employment and a stable economy. Particularly after the establishment of a new international monetary system that replaced gold standard and introduced the Bretton Woods system in 1970s (where U.S. dollar became the global currency), most economies experienced high inflation and low economic growth (Bhatta, 2015). This anomaly further strengthened the need of research to investigate the relationship between these two important macroeconomic variables i.e., to test the hypotheses whether there exists an inverse relationship between inflation and growth. This also therefore required answering the question at what levels should the inflation rate be constrained so that it does not start retarding the growth rate?

Keywords

• inflation
• growth
• nonlinearity
• inflation threshold
• logistic smooth transition regression
• lstr