Examining Inflation Effect on Economic Growth:

Empirical Evidence & Analysis from SAARC Countries

Abstract

The primary objective of this study is to investigate the impact of inflation on economic growth and thereby the inflation threshold for SAARC countries. For this purpose, “Inflation, consumer prices (annual % growth)” and “GDP (annual % growth)”- data series for the period of 1990 to 2024 have been considered. Three econometric models, like Panel Least Squares (PLS), Panel Threshold Regression (PTR), and Panel Spline Regression (PSR), are employed to estimate whether there is a linear or non-linear relationship between inflation and economic growth, and the optimal inflation rate to ensure sustainable future economic growth. The findings expose a non-linear and statistically significant inverse relationship when inflation exceeds the threshold level of 10%. Afterwards, inflation begins to hinder economic growth in the SAARC countries. The outcomes are statistically significant at the 0.000 level, which is well below the 0.05 (5%) significance level. These upshots provide valuable insights for governments, policymakers, central banks, and financial analysts to develop effective monetary and fiscal policies, ultimately aiding investors in making investment decisions.