ABSTRACT

The relationship between Inflation and Economic Growth has been empirically investigated to scrutinize whether this relationship exists or not, if this is so, then are they inconsistent at a different level of inflation? It also examines the optimal levels of inflation in Pakistan and compares it with the rest of the world by dividing the whole sample into 3 groups; high, middle, and low income. The study uses a secondary data set for 86 countries on the basis of their income level for the time period 1996-2020. Pre-estimation techniques like stationarity test and correlation analysis are done. The dynamic threshold regression model is used in order to estimate thresholds. Other econometrics techniques such as GMM and GLS are used that provide appropriate procedures for estimation and inferences. The results depict a negative and significant relationship between inflation and growth above the threshold level. The estimated threshold for high-income countries is 1-2%, 3-28% for middle-income, and 9- 13% for low-income countries. Regarding the estimated method, the exclusion of highinflation observations, the frequency of data, and different specifications, the negative and significant relationship between inflation and Economic growth for inflation rates above the threshold level is extremely strong. It is recommended that Governments and central banks should have to take into account that each country is unique and that the optimum strategy for catching up with or for sustained growth is not the same for every nation in the world. However, For Pakistan to experience the best economic growth, the inflation rate should be kept at or around 9%, and expectations for inflation should be maintained close to the target level.