Re-examining the Threshold Effects in Inflation–Growth Nexus: Evidence from India

Abstract

The main purpose of this study is to re-examine the threshold effect of inflation and economic growth relationship in India. Methodology: The study estimated the non-linear regression model to examine the non-linearity between inflation and growth, further logistic smooth transition regression (LSTR)method is employed to find the threshold level of inflation for the period 2004:Q1 to 2014:Q2. The robustness of the results is also checked. Findings: On the relationship between inflation and economic growth, we have strong evidence in favor of nonlinear relationship. The estimated threshold level of inflation is found at 6.75 percent in India. Below this level, there exists significant positive relationship between inflation and growth, while above this threshold level, inflation retards growth performance. Sensitivity analysis confirmed the robustness of empirical results. Recommendations: The findings suggest that bringing inflation below the threshold level of 6. 75 percent should be the goal of macroeconomic policies. The outcome of this study will be relevant to monetary policy makers and academicians interested in the trade-off.