Threshold Level of Inflation for Growth-Empirical Study

Abstract

Inflation is one of the most important macroeconomic indicators, which has always attracted the attention of economists while planning and implementing plans for growth and development. It is argued that inflation affects growth adversely only after it crosses a certain threshold level. Below the threshold level and up to an optimum level of inflation, it has favourable and positive impact on growth. Thus, attainment of reasonable level of stable inflation rate that may differ from country to country, depending upon different priorities at different stages of development, is the prime objective of monetary policy worldwide. In this paper, attempt has been made to determine the threshold level of inflation for the Indian economy using quarterly data from 2004–2005 to 2012–2013. Three methods have been used to analyse the threshold level of inflation: spline regression, vector autoregression and non-linear regression. The threshold level of inflation using non-linear regression (cubic polynomial fit) has been concluded to be at 7.7%. The results of this study are in contrast to most of the previous studies which have prescribed the same to be ranging between 5–7%.