On Nonlinear Relationship between Inflation and Economic Growth: A Study of ASEAN-5 Countries Period 2000–2016

Ambar Galih, Sugiharso Safuan


Money (inflation) has played a vital role in economic growth. However, the nexus between them has always drawn mesmerizing debates. From the thoughts of Classical and Keynes which argued the existence of money neutrality, to the level of empirical studies which find either positive or negative correlation between inflation and economic growth. Recent studies concerning the debatable relationship have evolved it into a hypothesis whether the relation is nonlinear with a threshold or a point where the link switches. This study aims to re-examine the causality between inflation and economic growth in ASEAN-5 countries period 2000Q1–2016Q4. The results based on Threshold Vector Autoregression model indicate the presence of a nonlinear relationship between the two variables.


threshold; inflation; economic growth; threshold VAR

Full Text:



Avdjiev, S & Zeng, Z 2014, ’Credit growth, monetary policy, and economic activity in a three-regime TVAR model’, BIS Working Papers No. 449, Bank for International Settlements. https://www.bis.org/publ/work449.pdf.

Balke, NS 2000, ’Credit and economic activity: credit regimes and nonlinear propagation of shocks’, Review of Economics and Statistics, vol. 82, no. 2, pp. 344–349. DOI: https://doi.org/10.1162/rest.2000.82.2.344.

Boyd, JH & Champ, B 2006, ’Inflation, banking, and economic growth’, [Economic Commentary], Federal Reserve Bank of Cleveland,


Bruno, M & Easterly, W 1998, ’Inflation crises and long-run growth’, Journal of Monetary Economics, vol. 41, no. 1, pp. 3–26. DOI: https://doi.org/10.1016/S0304-3932(97)00063-9.

Chowdhury, A & Ham, R 2009, ’Inflation targeting in Indonesia: Searching for a threshold’, The Singapore Economic Review, vol. 54, no. 04, pp. 645–655. DOI: https://doi.org/10.1142/S021759080900346X.

Dornbusch, R & Frenkel, JA 1973, ’Inflation and growth: alternative approaches’, Journal of Money, Credit and Banking, vol. 5, no. 1, pp. 141–156. DOI: 10.2307/1991068.

Feldstein, M 1982, ’The fiscal framework of monetary policy’, NBER Working Paper No. 966, National Bureau of Economic Research, Cambridge, Massachusetts. http://www.nber.org/papers/w0966.pdf.

Fischer, S 1993, ’The role of macroeconomic factors in growth’, Journal of Monetary Economics, vol. 32, no. 3, pp. 485–512. DOI: https://doi.org/10.1016/0304-3932(93)90027-D.

Galí, J 2008, Monetary policy, inflation, and the business cycle: an introduction to the Keynesian framework, Princeton University Press, New Jersey.

Ghosh, A & Phillips, S 1998, ’Warning: Inflation may be harmful to your growth’, IMF Economic Review [Staff Papers], vol. 45, no. 4, pp. 672–710. DOI: https://doi.org/10.2307/3867589.

Gillman, M & Kejak, M 2005, ’Contrasting models of the effect of inflation on growth’, Journal of Economic Surveys, vol. 19, no. 1, pp. 113–136. DOI: https://doi.org/10.1111/j.0950-0804.2005.00241.x.

Khan, MS & Senhadji, AS 2001, ’Threshold effects in the relationship between inflation and growth’, IMF Economic Review [Staff Papers], vol. 48, no. 1, pp. 1–21. DOI: https://doi.org/10.2307/4621658.

Kremer, S, Bick, A & Nautz, D 2013, ’Inflation and growth: new evidence from a dynamic panel threshold analysis’, Empirical Economics, vol. 44, no. 2, pp. 861–878. DOI: https://doi.org/10.1007/s00181-012-0553-9.

Lucas, RE 1973, ’Some international evidence on output inflation tradeoffs’, The American Economic Review, vol. 63, no. 3, pp. 326–334.

Munir, Q & Mansur, K 2009, ’Non-linearity between inflation rate and GDP growth in Malaysia’, Economics Bulletin, vol. 29, no. 3, pp. 1555–1569.

Munir, Q, Mansur, K & Furuoka, F 2009, ’Inflation and economic growth in Malaysia: A threshold regression approach’, ASEAN Economic Bulletin, 26(2), pp.180-193.

Omay, T & Kan, EÖ 2010, ’Re-examining the threshold effects in the inflation–growth nexus with cross-sectionally dependent non-linear panel: Evidence from six industrialized economies’, Economic Modelling, vol. 27, no. 5, pp. 996–1005. DOI: https://doi.org/10.1016/j.econmod.2010.04.011.

Sarel, M 1996, ’Nonlinear effects of inflation on economic growth’, IMF Economic Review [Staff Papers], vol. 43, no. 1, pp. 199–215. DOI: https://doi.org/10.2307/3867357.

Stockman, AC 1981, ’Effects of inflation on the pattern of international trade’, NBER Working Paper No. 713, National Bureau of Economic Research, Cambridge, Massachusetts, http://www.nber.org/papers/w713. DOI: 10.3386/w0713.

Thanh, SD 2015, ’Threshold effects of inflation on growth in the ASEAN-5 countries: A panel smooth transition regression approach’, Journal of Economics, Finance and Administrative Science, vol. 20, no. 38, pp. 41–48. DOI: https://doi.org/10.1016/j.jefas.2015.01.003.

Tobin, J 1965, ’Money and economic growth’, Econometrica, vol. 33, no. 4. pp. 671–684. DOI: 10.2307/1910352.

Tong, H 1983, Threshold models in non-linear time series analysis, Springer-Verlag New York. DOI: 10.1007/978-1-4684-7888-4.

Vinayagathasan, T 2013, ’Inflation and economic growth: A dynamic panel threshold analysis for Asian economies’, Journal of Asian Economics, vol. 26, pp. 31–41.


  • There are currently no refbacks.