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The Study Of Inflation And Economic Growth Essay

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The survey of rising prices and economic growing has attracted extended literature throughout the old ages. This subject was ab initio studied under the inactive theoretical accounts such as IS-LM and AD-AS model. The inactive attack could non explicate the Dynamic and empirical facet of rising prices and growing therefore the demand of dynamic attack was felt to explicate the vigorous correlativity of rising prices and growing. The foundation of neoclassical growing theory advanced to a new pecuniary growing theoretical account.

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Tobin ( 1965 ) constructed pecuniary growing theoretical account based on Solow ( 1956 ) growing theoretical account. He argued that by increasing the cost of keeping money, people substitute to physical capital therefore rising prices leads to higher growing rate ( 40 ) ( Temple ) 2000, p.397 ).

The non-neutrality of money in the instance of Tobin ‘s was restated by Fischer ( 1971 ), that the steady high degree of rising prices will do an addition in the steady province degree of capital stock. Sidrauski ( 1967, 1969 ) unlike Tobin found super-neutrality of money. He presented a theoretical account stressing that the steady stock degree is independent of rising prices rate.

He argued that Tobin ‘s theoretical account does non demo the status under which the steady province degree is achieved or maintained. Johnson ( 1966 ) suggested long-term independence of rising prices growing while pecuniary policy can impact growing in short-run.

Stein ( 1966, 1970 ), Levhari and Patinkin ( 1968 ), Hahn ( 1969 ) and Nagatani ( 1970 ) pointed out the instability of Tobin ‘s theoretical account. On other manus Friedman ( 1968, 1978 ) opposed the thought of rising prices and pointed the costs of high rising prices and benefits of low rising prices. Dornbusch and Frenkel ( 1974 ) could non stipulate any correlativity between rising prices and growing. Brock ( 1974 ) adopted endogenous theoretical account under consumer maximization behavior and public-service corporation map. Stockman ( 1981 ) constructed a pecuniary growing theoretical account with a Cash In Advance theoretical account within one sector. He found negative relation, as an addition in the rising prices rate causes a lessening in the existent wealth of money holder.

The endogenous growing theory emerged in late eightiess developed by Romer ( 1986 ) and Lucas ( 1988 ) ; new growing theories gave long-term endogenous growing rate based on the premise that production map is relative to a wide step of the capital stock. Capital stock consists of physical stock of machines and the stock of rational thoughts i.e. cognition ( Ploeg & A ; Alogoskoufis, 1994, p. 772 ) hence engineering degree is explained within the theoretical account by taking into history effectual labor and human capital. Wang and Yip ( 1992 ) reassessed the differences of three attacks of endogenous theoretical accounts ; i.e. money in public-service corporation map, hard currency in progress theoretical account and dealing cost theoretical account. Ploeg and Alogoskoufis ( 1994 ) extended endogenous pecuniary growing theoretical account, demoing the non-neutrality of money in the long tally, proposing negative and positive effects of money on growing depending on the pecuniary and financial steps. Probably, Rogers and Wang ( 1993 ), Jones and Manuelli ( 1995 ) and Gillman & A ; Kejak ( 2003 ) besides contributed to the literature. These mixtures of theoretical theoretical accounts led to huge literature of empirical plants. The empirical literature shows assorted consequences.

Traditional Keynesian attack to rising prices and growing was based on the inactive modeling and analysis. The IS-LM and AS-DS model was a utile tool in analyzing the relation between rising prices and growing ( as discussed in theoretical subdivision of this paper ). However, it was criticized based on the dynamic nature of the crisis in 1950s and 1960s in Latin American Countries. The traditional inactive attack was criticized based on ; first the inactive nature could non explicate the dynamic empirical grounds, 2nd it lacked the micro foundation and 3rd the issues of short-run and long-run kineticss ( Krishna and Skott, 2005, p. 9-11 ). The old position was further developed by Philips ( 1958 ) who presented an empirical paper which suggested that there is a positive relationship between money rewards and employment degree. In other words that accomplishing high economic public presentation was positively correlated to increasing rising prices. Kaldor ( 1959 ) besides suggested a positive relation between pecuniary growing and economic growing. However, Melton Friedman ( 1968 ) opposed the Philips preposition of money rewards growing being contributing for betterment of employment. He highlighted the restrictions of pecuniary policy ; first restriction, pecuniary policy can non nail down the involvement rate. Second, it besides can non nail down the employment degree in the economic system.

Neoclassic growing theory

The early part to the literature on money and growing were developed from the neo-classical growing theory. Solow and Swan ( 1956 ) presented exogenic growing theory. The Solow theoretical account present a relationship of four variables ; Output ( Y ) is dependent on ( K, A, L ). “ K ” is capital, “ L ” is labour and “ A ” is cognition or labour effectivity. This was the innovator of economic growing theory, this helped economic expert to widen pecuniary policy to pattern in order to analyze the relationship of money and economic growing ( Romer 2006, p. 9 ).

Neo-classical growing theoretical account is the footing for all economic growing related analysis. This theoretical account was developed by the work of Solow and Swan in 1956. In Solow theoretical account, labour and engineering are used as replacements. In this theoretical account, it is assumed that a part of income is saved which is further invested therefore it shows changeless but decreasing returns on labor. Technological advancement and changeless investing are the chief two factors that explain the long term growing of a state. These factors are considered exogenously ( Zhang, 2005 ; p. 77, 78 ). The neoclassical theoretical account is discussed in item in the section-3 of this paper.

The Mundell and Tobin Model

Mundell ( 1963 ) and Tobin ( 1965 ) in two different documents “ rising prices and existent involvement ” and “ Money and Growth ” severally showed a positive relationship between rising prices and growing. Mundell made few premises to construct his theoretical account. First, it is assumed that rewards and monetary values are flexible in order to keep uninterrupted full employment so that the portion of net income is changeless under full employment. Second, wealth is held either in money or portions and the existent value of portion decided by the existent involvement rate. Third, it is further assumed that the existent investing depends on the existent involvement rate and nest eggs on the existent balances ( 0000 1963, p. 280 ). Mundell in his paper suggested that the rate at which involvement rate rises is ever less than the rate of rising prices rise which is caused by the money growing. Therefore, the existent involvement rate autumn which reduces the wealth of people and to accomplish the same degree of wealth people save more. Therefore, stimulated nest eggs have a positive consequence on the economic activity ( 0000 1963, p. 283 ).

On the other manus, Tobin ( 1965 ) suggested similar consequence. Tobin extended the neo-classical theoretical account with pecuniary model. He presented the theoretical account under the premises i.e. first ; Government injects money by transportation of payments and people held money either for ingestion or for investing which depends on portfolio behavior. Second premise is, people held two-assets portfolio either in money or securities. He showed that an addition in the rising prices rate makes money less attractive therefore people shifts to an alternate manner of hive awaying money which is puting in portfolio. Hence rising prices increases the salvaging rate which will further increase investing therefore the rate of capital accretion will besides increase as it is shown in Figure ( 1 ).

Figure 1: The Tobin consequence show that an addition in rising prices will switch the penchants of people from money to capital ( Source ; 01, 2004, p.11 ).In the above figure ( 1 ), it is depicted that an addition in the rising prices rate makes money less attractive therefore money balances are non held since it does non give rate of return. Peoples start puting their money in other assets that give an attractive rate of return harmonizing to portfolio behavior. As rising prices rises from ?»0 to ?»1, the return on money falls hence people will replace money by other portfolio assets. This displacement is clear from Sk to Sk` Thus, as rising prices rises there is a lasting addition from K0 to K1. In consequence the degree of investing in the economic system additions and economic growing gets stimulus. Therefore there is a positive relation between rising prices and capital accretion. This is true because money affects the existent disposal income which farther determines the degree of ingestion or nest eggs ( 01, 2004, pp. 11-12 )

Tobin ‘s Model was further developed by Johnson ( 1966 ) who besides represented the neo-classical one sector growing theoretical account within pecuniary extension. He assumed salvaging and demand map for existent balances. He suggested that though, the long-term economic growing is independent of money supply, yet pecuniary authorization can excite the economic growing by increasing or diminishing the supply of money in the economic system ( Johnson 1966, pp. 286 ). Levhari and Patinkin ( 1968 ) developed a theoretical account with extension to Tobin ‘s theoretical account. They considered money as consumers ‘ goods and manufacturers ‘ goods merely. They concluded that single behavior will non impact either by addition in the money supply or alterations in monetary value degree ( Levhari & A ; Patinkin 1968, p. 752 ).

Haslag ( 1997 ) pointed that Tobin consequence shows a lasting consequence of rising prices on growing but one time steady province degree is achieved so there is no growing. Hence, the consequence of rising prices on growing is temporarily and in passage from one steady province capital degree to another steady province capital degree ( 00, 1997, p.13 ). With advancement to these paper, Nagatani ( 1970 ) presented a note on Tobin work 1965 “ Money and Economic Growth ”. He pointed out the instability in the theoretical account as it was pin pointed by Sidrauski and Stein severally. They argued that if we eliminate the Tobin ‘s premise of monetary value outlook so people ‘s outlook can non be formed it means theoretical account can non be stable. Furthermore, the interaction between market accommodation kineticss and growing kineticss are affected by desirable system behavior ( Natagani 1970, pp. 175 ).

Counter Revolution of Monetarism

In the late sixtiess monetarism emerged strongly by opposing rising prices led growing. They argued that rising prices is non necessary for long-run qualitative growing since ; inflationary policies distort the economic growing in the long tally during the procedure of economic development. They presented the illustration of Latin American states where inflationary force per unit areas had created terrible monetary value deformation that led to misallocation of resources and other constrictions. The other job in gradual rise in monetary values in the public public-service corporation sector may follow to curtail farther monetary values which creates big public shortage. This was the instance in Argentina, Brazil and Chilli. These statements and treatments created an speculative hunt for the relationship between rising prices and growing ( Bear 1967 ; p. 5-6 ).

Sidraski ‘s Super-neutrality Approach

Sidrauski ( 1967 ) argued that Tobin tried to demo the steady province degree but it does non explicate that what are the conditions under which the steady province is achieved or it is maintained? There is no ground why the economic system should stay at the steady province degree whereas the dynamic economic market affects the conditions of growing. Hence, the steady province degree is dependent to the family or single behavior under which the economic system grows. Sidrauski extended the Solow-Swan theoretical account into pecuniary construction in order to analyze the jobs related to a stabilised equilibrium growing way in pecuniary economic system. He assumed an alternate as existent plus where people can hold a pick ; either put in capital or held Government bonds in their portfolios. Conclusion suggested ace neutrality of money ; it means that money does non impact the existent variables in the long tally but it is the rate of alteration of pecuniary enlargement that will impact the steady province degree of capital accretion ( Sidrauski ; 1967, pp.796-7 ). However, He besides suggested that it still depends on the family or single behavior towards rising prices. In fact, He referred this phenomenon as dependant on people ‘s felicity, where people nest eggs can change. Unlike Tobin premise that people salvaging to end product ratio is fixed. ( 00 1997, pp. 13 ). Similarly Sidrauski ( 1969 ) one time once more constructed a pecuniary growing model within public-service corporation optimisation theoretical account. He suggested that steady stock degree is independent of rising prices rate.

Mundell, Tobin and Sidrauski ‘s documents were followed by other research documents. Stein ( 1966 ) presented a theoretical account demoing the relationship of pecuniary variables, growing and the ratio of fiscal assets of the private sector to the stock of money. He suggested that pecuniary variables do impact the existent variables. Therefore, money is non impersonal ( Stein, 1966 pp, 465 ). He besides presented a positive relation between rising prices and capital strength. However, the suggested that monetary value stableness can predominate if there is a balance in portfolio assets ( Stein, 1968, pp. 950 ). Stein ( 1970 ) one time once more evaluated the pecuniary growing policy. His findings once more suggested that the pecuniary growing does impact the capital strength in the economic system but he still remained diffident about the effectual pecuniary growing theoretical account.

Dornbusch and Frenkel ( 1973 ) adopted a new attack to measure the consequence of rising prices on growing. The chief aim was to analysis the channels through which rising prices affect the existent variables. The decision of his findings was equivocal and did non stipulate the effectual correlativity between rising prices and growing. Brock ( 1974 ) studied the relationship of money and growing as an endogenous attack by utilizing houses and consumer ‘s maximization behavior to analysis the long-run perfect foresight. The decision of his research achieved the implicit in aims. First, an equilibrium theoretical account attack where outlooks were analysed endogenously. Second high rising prices skyline created fringy disutility for families. When the rate of nominal transportations was increasing so the steady province degree declined and eventually the public assistance cost of rising prices create a Pareto impression of optimum. Harkness ( 1978 ) evaluated the consequence of money on existent balances. He suggested that any sort of outlook on transportation and rising prices rate can impact the steady province rate of return on existent balances and this can bring forth the phenomenon of non-neutrality of money ( P. 711 )

The above conflicting theories and positions sing the money and growing remained unreciprocated and hence empirical research could work out the underlying relationship between rising prices and growing. Wallich ( 1969 ) carried out an empirical analysis of money and growing. His paper was based on 43 states and the information was selected for the old ages 1956-1965. His findings suggested a negative relationship between rising prices and growing which was contrary to Mundell and Tobin ‘s consequence ( Wallich, 1969 pp. 302 ).

Dornbusch and Frenkel ( 1973 ) adopted a new attack to measure the consequence of rising prices on growing. The chief aim was to analysis the channels through which rising prices affect the existent variables. The decision of his findings was equivocal and did non stipulate the effectual correlativity between rising prices and growing. Brock ( 1974 ) studied the relationship of money and growing as an endogenous attack by utilizing houses and consumer ‘s maximization behavior to analysis the long-run perfect foresight. The decision of his research achieved the implicit in aims. First, an equilibrium theoretical account attack where outlooks were analysed endogenously. Second high rising prices skyline created fringy disutility for families. When the rate of nominal transportations was increasing so the steady province degree declined and eventually the public assistance cost of rising prices create a Pareto impression of optimum. Harkness ( 1978 ) evaluated the consequence of money on existent balances. He suggested that any sort of outlook on transportation and rising prices rate can impact the steady province rate of return on existent balances and this can bring forth the phenomenon of non-neutrality of money ( P. 711 )

Stockman ‘s Negative Consequence

Stockman ( 1981 ) developed a theoretical account to measure the relationship between rising prices and economic growing. His theoretical account was based on cash-in-advance restraint. It means hard currency is held in progress before puting in capital. He suggested that an addition in the rate of rising prices causes a decrease in the existent wealth of money holder. Hence, investing in ingestion and capital goods besides come down ( Stockman 1981, pp. 393 ). Stockman in his theoretical account assumed money and capital as complementary goods, mentioning merely to goods sector. The stock raiser ‘s consequence is referred to a negative relationship between rising prices and economic growing. Carlson ( 1980 ) carried an empirical research and his findings suggested a weak negative relationship between pecuniary growing and economic growing. He said that the existent economic addition can be achieved by cut downing the tendency of pecuniary growing ( Carlson 1980, pp. 19 ) …

Michael ( 1989 ) developed a theoretical account to measure rising prices and the discrepancy of rising prices every bit good as the relationship between rising prices discrepancy and end product discrepancy. The survey suggested that rising prices discrepancy can foretell the existent end product discrepancy. Though there was no bidirectional causal relationship yet, it predicted positive relation from rising prices to existent end product. Cooly and Hansen ( 1989 ) introduced money into existent concern rhythm with cash-in-advance economic system. His consequence suggested that there is negative relation between high rising prices and investing ingestion. Furthermore, his findings besides showed that there is a negative relation between the rate of rising prices and the rate of employment ; conforming the consequence of Friedman analysis in 1977 ( Cooly and Hansen 1989, pp. 745 )

Endogenous Growth Theory

In late eightiess with the development of “ Endogenous Growth Theory ”, the survey of rising prices and growing got another bend. Endogenous growing theory explains growing by the factors within the production map. In new growing theoretical account, the rate of growing is dependent on the rate of return on capital hence widening endogenous growing theoretical account with pecuniary analysis will state us how rising prices affects the rate of return on capital ( 01 Gokal & A ; Hanif, 2004, p. 16 ). The relationship of rising prices and economic growing has been studied within endogenous growing theory.

Wang and Yip ( 1992 ) reassessed the differences of three attacks of endogenous theoretical accounts ; i.e. MIU map, CIA and TC theoretical accounts. They suggested that TC ( Transaction Cost ) model gives different consequence than other two attacks. Ploeg and Alogoskoufis ( 1994 ) extended endogenous pecuniary growing theoretical account, demoing the non-neutrality of money in the long tally, they concluded that money may impact growing either positively or negatively, depending on the attach toing pecuniary and financial policies. Jones and Manuelli ( 1995 ) besides presented no growing consequence of rising prices within endogenous growing theoretical account. He found no difference between endogenous and exogenic theoretical accounts. He besides analyzed the public assistance cost of rising prices.

The consequence of rising prices on the public assistance was fringy. Gillman and Kejak ( 2003 ) in recent paper analysed the theoretical theoretical accounts of rising prices and endogenous growing theoretical accounts. He found important negative relation. He farther classified the implicit in three theoretical accounts harmonizing to Tobin ‘s Type consequence of rising prices. They found negative and positive type Tobin consequence in Ak and Ah theoretical accounts severally. However, combing both the theoretical accounts Ak*h theoretical account presented a positive Tobin type consequence.

Empirical Literature

Paul Gomme ( 1991 ) revisited the relationship of rising prices and growing under the endogenous growing theoretical account with public-service corporation and production maps. The aim of his paper was to underscore the relation between rising prices and growing, at the same clip to analyse the public assistance cost of rising prices. The consequence of his paper suggested a negative consequence of rising prices on growing but the public assistance cost of rising prices was somewhat lower. Jose De Gregorio ( 1991 ) conducted a research on Latin American states and the consequence suggested a negative relationship between rising prices and growing. His survey was based on the endogenous growing theoretical account in order to analyze the channels through which rising prices affects growing. He emphasised that rising prices is to be stopped nevertheless ; this will still non vouch the quality growing ( Gregorio 1991 ; pp. 8-9 ). Frenandez Valdovinos ( 2003 ) through empirical observation found negative relation between growing rate and the degree of rising prices for eight Latin American states.

Stanely Fischer ( 1993 ) carried out a cross-sectional and panel arrested development to measure the relationship between rising prices and economic growing. He used arrested development parallel of growing accounting, originating from the production map and widening to endogenous variables to the theoretical account. The consequence suggested that growing in negatively related with rising prices. He identified the channel through which rising prices affects growing. Channels through which rising prices affects growing are ; decrease in investing outgos and productiveness growing.

Stanners ( 1993 ) presented statistical and empirical grounds in order to reply if low or zero rising prices rates is an indispensable status for growing. He presented figure of states with clip series informations within an single state and different panel states. He found that empirical grounds does non back up the thought that low or zero rising prices is associated with the growing rate of states ( Stanners 1993, p. 106 ).

Barro ( 1996 ) presented empirical grounds in a panel of 100 states while utilizing arrested development analysis. He includes figure of determiners of growing with rising prices rate. The survey suggested that there is important negative relation between rising prices and growing. One of the really of import channel through which rising prices does impact growing is the investing. However the decision of Barro was argued by Stanners ( 1996 ) that in fact there is no empirical correlativity between the degree of rising prices and growing rate. Hence, econometric analysis may be misdirecting.

De Gregerio ( 1996 ) added farther penetration to theoretical and empirical literature of rising prices and growing. He extended his survey to the function of cardinal bank policy, the manner it affects the rising prices and end product. He peculiarly focused how the alteration of rising prices rate affects the degree of investing and the efficiency of investing. He found a robust negative relationship between rising prices and growing through investing. Inflation negatively affects the efficiency of investing instead than it degree. He suggested that cardinal bank policy can stabilise the monetary value degree and can bring forth less rising prices tendency with no existent cost. Patnaik & A ; Joshi ( 1995 ) found similar empirical consequence for India. They studied the effects of rising prices on end product through investing determinations. They concluded a negative long-term relationship between high rising prices and investing. It was besides suggested that low rising prices will be contributing for long-term growing and stableness of economic system.

Jones, Manuelli and Chari ( 1995 ) did an empirical research with the money demand under three different theoretical accounts i.e hard currency in progress or ( CIA ) in ingestion theoretical account, shopping clip theoretical account and 3rd CIA ( Cash in progress ) with differential productiveness between investing and purchases. They suggested a negative relation between rising prices and growing. However, they besides studied this relation with the extension of banking, growing and rising prices which besides suggested a negative relationship.

Alexander ( 1997 ) did an econometric empirical research to look into the tradeoff of rising prices and growing within a growing equation. He adopted a theoretical account under production map by modifying the growing equation with the possibility of add-on variables. He selected a pool of clip series in a cross subdivision manner of 11 states. He suggested that rising prices negatively affects the profitableness of investing which further affects the end product degree in the economic system. Therefore by take downing the rising prices rate, the growing rate is improved. Statistically if rising prices is lowered from 6 % to 2 %, the growing rate will be improved about 1 % ( Alexander 1997, p. 237-238 ). With response to this paper, Stanners ( 1997 ) opposed Alexander ‘s work by reasoning that growing rates are non related with the rising prices rate. Furthermore, he argued that the extension of extra variables in Alexander ‘s work is non justified and explained within the growing equation theoretical account.

Bruno and Easterly ( 1996 ) figured the jobs with respect to non-linear relationship of rising prices and growing within a pooled cross-country datasets. They argued that the relation of rising prices and growing is sometimes puzzled if it is studied in a pooled information set. Their survey was based on an premise that extremely rising prices crisis is more than 40 %. They found no correlativity for the states with less than 40 % rising prices one-year rate but above this degree at that place was negative relation for short and average tally ( Bruno & A ; Easterly 1996, p. 145 ). Bruno and Easterly ( 1997 ) one time once more examined the relation under utmost distinct rising prices monetary values ( Period in which rising prices is above some threshold degree ; i.e. 40 % yearly ). They found a important negative relation between rising prices and growing in the short and average tally. However, as the rising prices continues to fall below the threshold the growing rate rapidly recovers ( Bruno & A ; Easterly 1997, p. 3 ).

Ahmad and Rogers ( 1998 ) studied rising prices, end product, ingestion and investing relationship within an econometric empirical analysis for US informations. Their cointegration consequence showed a contradictory position to endogenous negative relation between rising prices and other existent variables in long tally, while back uping the Tobin ‘s type consequence of rising prices ( Ahmad & A ; Rogers 1998, p. 24-25 ). Shi ( 1999 ) extended AK Cobb-Douglas theoretical account within divisible goods and money under the Household penchants and public-service corporation. He assumed that capital does non deprecate and the ingestion public-service corporation to be additive with fringy public-service corporation. His findings in a neoclassical pecuniary growing theoretical account suggested that the rate money growing increases the degree of tradable minutess by increasing the figure of agents in the market. Hence, there is a positive relation between the rate of money growing and capital accretion ( Shi 1999, p. 98 ). Faria ( 2001 ) used econometric analysis of bivariate clip series theoretical account for Brazil. Unlikely the consequence supported Sidrauski ‘s attack of ace neutrality of money. It means rising prices does non hold long-term consequence over existent growing ( Faria 2001, p.100 ).

Ghosh and Phillips ( 1998 ) followed the empirical literature. They found a negative relation between rising prices and growing in a penal arrested development analysis and non-linear specification. However, binary recursive tree methodological analysis was used which suggested rising prices is one of the cardinal elements of economic growing. This survey was farther extended to cognize the cost of disinflation. They concluded that there are short-term costs of disinflation. Malik and Chowdhury ( 2001 ) studied rising prices and growing nexus for four South Asian ( Bangladesh, India, Pakistan and Srilanka ) states utilizing econometric analysis. They found long-run positive relation between rising prices and growing for these states ( Malik & A ; Chawdury 2001p. 123 ). Gyllapson and Herbertsson ( 2001 ) in cross-country panel informations of 170 states found a negative consequence if rising prices is in extra to 10-2- % yearly. They used simple production map theoretical account integrating money and finance in optimum growing with changeless returns to capital. Arai et Al ( 2002 ) focussed on the cyclical and causal relation between rising prices and GDP growing with arrested development analysis for 115 states. Empirical consequence showed no grounds that rising prices is harmful, except for states where rising prices was caused by oil monetary value dazes ( Arai et, 2002, p. 15 ).

Gillman and Kejak ( 2002 ) in a penal survey to measure the consequence of rising prices on growing within three sector economic system with a human and physical capital theoretical account under the endogenous public-service corporation map. They found a important negative relation for the penal information. Gillman and Cziraky ( 2004 ) constructed a theoretical account of non-market sectors with hard currency in progress and human capital theoretical account. In non-market sector dealing takes consequence with hard currency merely hence rising prices revenue enhancement can non be avoided. Their empiric was based on belowground economic systems of Bulgaria, Croatia and Romania. The consequence of theory and econometric analysis varied with negative and positive relation for single states ( Gillman & A ; Czirky 2004, p. 39 ).

Guerrero ( 2004 ) through empirical observation with econometric analysis found important negative relation for cross states informations. He besides suggested that states that have experienced hyperinflation have turned to low rising prices tendency than those who have non. Hanif and Gokal ( 2004 ) in the instance of Fiji found one time once more important negative relation between rising prices and GDP growing. Boyed and Champ ( 2006 ) in a cross state empirical analysis with a banking attack, suggested that states with 5 or 10 % rising prices rate, a decrease in rising prices should heighten economic public presentation.

Fountas et Al ( 2002 ) used GARCH theoretical account, the empirical work in the instance of Japan showed that high variableness of rising prices causes rising prices uncertainness therefore impacting the end product growing negatively ( Fountas ( 82 ), 2002, p. 293 ). In similar manner, Hwang ( 2007 ) tested the causality of rising prices and growing in econometric analysis, utilizing VARMA and GARCH Asymmetric modeling,. The consequences showed that period of high volatility in rising prices are followed by increased fluctuation in existent growing. Hu-Qin and Zhen-Yu ( 2006 ) through empirical observation showed a negative relation between rising prices and existent growing for China, utilizing econometric analysis ( 81 ). Naryana et Al ( 2009 ) likewise, found that high rising prices volatility affects end product growing negatively.

The mix theoretical and empirical literature besides motivated the non-linear or threshold consequence survey of rising prices and growing. For illustration, Sarel ( 1995 ) in a Penal dataset of 87 states examined the nonlinear effects of rising prices and growing. The consequence found a structural interruption. The survey explained the grounds of structural interruption. The positive consequence of rising prices on growing was found through empirical observation earlier 1970s, it is merely because there were non many episodes of high rising prices but during and after 1970s the high rising prices tendency showed a important negative consequence of rising prices on growing. The non-linear consequence besides found that rising prices below 8 % has no important negative consequence over growing but above this rate there is a negative consequence ( Sarel 1995, p. 13 ). Khan and Sanjida ( 2001 ) estimated 1 % for industrial states and 11 % for developing states. Beyond these rates rising prices affects growing negatively. Mubarik ( 2005 ) showed 9 % threshold consequence for Pakistan where as the causality consequence was from rising prices to growing.

Once of the most concerning issue is the welfare consequence of rising prices which is striking issue is most of the developing states. Some documents have entirely focussed on the public assistance consequence of rising prices through growing theoretical account. Rogers and Wang ( 1993 ) conducted their research paper understanding the relationship of rising prices and growing by seting frontward few inquiries and replying them through empirical observation. They argued ; first what is the cost of rising prices with comparing to the cost of take downing rising prices. Second, why is rising prices inveterate high in most of the Latin American states? Third, what are the nucleus grounds of extremely rising prices episode and eventually what is the cost of stabilising rising prices? ( Rogers and Wang 1993, pp. 37 )

By replying these inquiries, they replied with the consequence of paper that rising prices causes resource misallocation and public assistance cost of rising prices even if it is moderate but other inauspicious effects of rising prices on the economic activities are moderate. The 2nd reply for high rising prices for most Latin American states was that high Government shortage and pecuniary enlargement leads to rising prices trap. Third the ground of high rising prices episode was due to financial and pecuniary expansionary policy.

Finally the cost of stabilising would necessitate plans and effectual policies and that is why few of the high rising prices states succeeded in stabilising economic systems whereas others did non ( Rogers and Wang 1993, pp. 49 ).Wu and Zhang ( 1998 ) studied the public assistance cost of rising prices under endogenous growing theory. They constructed a pecuniary growing theoretical account within Romer ‘s 1986 methodological analysis of capital outwardness and money demand map. The public assistance cost of rising prices under public-service corporation and CIA ( Cash in Advance Model ) suggested that though pecuniary growing stimulates economic system temporarily. but the long-term consequence of rising prices is larger in the long-run ( ( 12 ) Wu & A ; Zhang, 1998, p. 281 ).

Recent Epirical work

Erbaykal and Okuyan ( 2008 ) tested the causality relationship between rising prices and growing with econometric attack for Turky. They found important negative causality from rising prices to growing ( 8, 2008, p. 40 ). Similarly, Berument et Al ( 2008 ) besides found negative relation between rising prices and growing for Turkey, they besides adopted econometric modeling ( 28, 2008, p. 192 ). Chatervedi et Al ( 2009 ) tested the interrelatedness of rising prices, growing and salvaging rate for south east and south Asiatic states in a penal information. Their econometric analysis suggested that rising prices has important negative consequence on growing but positive relation on nest eggs.

Cape Coast et Al ( 2009 ) through empirical observation tested the relation between rising prices, capital accretion and economic growing for 30 import-dependent developing states. They constructed inter-temporal optimising attack in which representatives derive public-service corporation. The basic premise was to take the super-neutrality by presuming today ‘s end product as a map of yesterdays ‘ stock. The empiric was the consequence of econometric analysis, utilizing Vector Autoregressive attack. They found that rising prices and economic growing had decreasing consequence on capital accretion ( 42, 2009, p. 27 ).

Recent empirical work by Espinoza et Al ( 2010 ) in a penal of 165 states with smooth passage theoretical account re-examined the threshold effects. They suggested that for emerging states rising prices above 10 % is harmful but for developed states the threshold consequence was much less ( 33, 2010, p. 12 ).

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The Study Of Inflation And Economic Growth Essay. (2018, Apr 10). Retrieved from https://graduateway.com/the-study-of-inflation-and-economic-growth/

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