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Inflation and Mexican economic growth: long‐run relation and threshold effects

Author

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  • W. Adrián Risso
  • Edgar J. Sánchez Carrera

Abstract

Purpose - The purpose of this paper is to estimate the long‐run relationships and threshold effects between inflation and economic growth in Mexico. Design/methodology/approach - The paper shows the existence of such relationship in a cointegrated vector on economic growth (log of real gross domestic product (GDP)) and inflation rate finding a corresponding elasticity significantly negative. Moreover, the causal relationship between these two series is studied using a more robust Granger causality test, without finding any directional causality between them. Findings - The estimated threshold model suggests 9 percent as the threshold level (i.e. structural break point) of inflation above which inflation significantly slows the Mexican economic growth. Research limitations/implications - This paper uses the cointegration technique, and finds a significant and negative long‐run relationship between inflation and economic growth for the Mexican economy. In addition, it is found that inflation is weakly exogenous. In the period 1970‐2007 real GDP was elastic with respect to inflation, and therefore, considering the estimated coefficient, an increase of 1 percent on inflation produces a decrease of 1.5 percent on real GDP. Since, for most of the period under consideration Mexico experienced inflation rates higher than 10 percent, this result is consistent with most of the research suggesting that high levels of inflation produce a negative effect on economic growth. Practical implications - The analysis could be useful for policymakers in providing some clue in setting an optimal inflation target. For instance, the Mexican Central Bank could apply an expansionary monetary policy for supporting economic growth until the inflation rate does not exceed the threshold level. In fact, the threshold analysis suggests that if the inflation rate exceeds 9 percent, then Mexico's current favorable economic performance might be jeopardized. Originality/value - Specifically, this paper focuses on two questions: is there any long‐run relationship between economic growth and inflation in Mexico? Is there a statistically significant threshold level of inflation above which inflation affects growth differently than at lower inflation rates in Mexico? Motivated by these questions, this present paper first examines cointegration techniques and then, threshold estimations.

Suggested Citation

  • W. Adrián Risso & Edgar J. Sánchez Carrera, 2009. "Inflation and Mexican economic growth: long‐run relation and threshold effects," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 1(3), pages 246-263, July.
  • Handle: RePEc:eme:jfeppp:v:1:y:2009:i:3:p:246-263
    DOI: 10.1108/17576380911041728
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    Citations

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    Cited by:

    1. Asaduzzaman, Md, 2021. "Relationship between threshold level of inflation and economic growth in Bangladesh- a multivariate quadratic regression analysis," MPRA Paper 110333, University Library of Munich, Germany, revised 02 Feb 2021.
    2. Ibrahim Abdulhamid Danlami, 2019. "Inflation Persistence in the West African Commonwealth Countries," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 5(3), pages 80-89, September.
    3. Ibrahim Abdulhamid Danlami & Sallahuddin Hassan & Mohamad Helmi Bin Hidthiir, 2020. "Assessing the Asymmetry of the Exchange Rate Pass-Through to Inflation in West African Commonwealth Countries," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 6(1), pages 93-109, March.
    4. Phiri, Andrew, 2013. "An inquisition into bivariate threshold effects in the inflation-growth correlation: Evaluating South Africa’s macroeconomic objectives," Business and Economic Horizons (BEH), Prague Development Center (PRADEC), vol. 9(3), pages 1-11.
    5. Tri Wahyu Adi & Eri Prabowo & Oetami Prasadjaningsih, 2022. "Influence of Electricity Consumption of Industrial and Business, Electricity Price, Inflation and Interest Rate on GDP and Investments in Indonesia," International Journal of Energy Economics and Policy, Econjournals, vol. 12(3), pages 331-340, May.
    6. Ibrahim Abdulhamid Danlami & Mohamad Helmi Bin Hidthiir & Sallahuddin Hassan, 2018. "Inflation in Sierra Leone: An Empirical Analysis of the Impact of Interest Rate on Price Level Changes," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 4(4), pages 42-49, December.
    7. Ibrahim Abdulhamid Danlami & Mohamad Helmi Bin Hidthiir & Sallahuddin Hassan, 2019. "Dynamic Analysis of the Effect of Fiscal Deficit on Inflation in Nigeria," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 5(2), pages 159-165, June.
    8. Saghir Pervaiz GHAURI & Rizwan Raheem AHMED & Jolita VVEINHARDT & Dalia STREIMIKIENE & Khalid Sarwar QURESHI, 2019. "The Effects of Remittances on Inflation (CPI and WPI) and Exchange Rate: A Case of Pakistan," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 146-165, June.
    9. M. Sani, Nur Fatin Najwa & Ismail, Fathiyah & W. Mahmood, Wan Mansor, 2014. "Causal relationship between financial depth and economic growth: evidence from Asia-Pacific Countries," MPRA Paper 62188, University Library of Munich, Germany.
    10. Ibrahim Abdulhamid Danlami, 2020. "Revisiting the West African Commonwealth Countries’ Exchange Rate Pass-Through to Inflation," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 6(1), pages 70-77, March.

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