IUP Publications Online
Home About IUP Magazines Journals Books Archives
     
Recommend    |    Subscriber Services    |    Feedback    |     Subscribe Online
 
The IUP Journal of Applied Economics
Does Government Spending Have a Role in Inflation-Growth Nexus? Evidence from a Dynamic Time Series Threshold Analysis in Egypt
:
:
:
:
:
:
:
:
:
 
 
 
 
 
 

Empirical evidence has indicated that there exists a threshold level of inflation, above which economic growth is hindered. Previous literature has shown that this level is around 1-3% in developed countries and 7-11% in developing countries. This paper tries to investigate the relationship between economic growth and inflation in Egypt by estimating the threshold inflation level during the period 1961-2016. As the paper fails to obtain any optimal rate of inflation and this result is in line with those obtained by most studies in the literature, the paper further examines the role of government spending in explaining the nature of the relationship between inflation and economic growth in Egypt.

 
 
 

Although inflation-growth nexus has been a subject of debate in the literature, in practice, high and sustainable growth of output has mostly been coupled with low to moderate and stable inflation rates. High inflation rates, on the other hand, have proved to hamper economic growth in both medium to long terms, as they distort price and market signals, leading to a less efficient resource allocation. Various central banks across the world, prompted by such connection, shifted to some forms of explicit or implicit inflation targeting. In an IMF survey for 88 developing countries, more than half expressed their desire to shift to inflation targeting policy.

Recently, the Egyptian economy has suffered from various macroeconomic imbalances, ranging from high current account and budget deficit, to high levels of capital flight and unsustainable external debt. These issues have caused multiple problems, mainly a high level of inflation, which has been associated with less domestic and foreign investment, and thereby lower levels of economic growth.

 
 
 

Applied Economics Jouranl.