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Non-productive consumption loans and threshold effects in the inflation-growth relationship

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  • Fu-Sheng Hung

Abstract

Recent empirical evidence indicates that two inflation thresholds exist in the inflation-growth relationship. Pre-existing theoretical models, however, fail to generate such a pattern. By adding consumption loans (which are non-productive) into a standard model of imperfect information, this paper finds that an increase in the inflation rate may increase, decrease, or have no significant effect on economic growth for inflation rates below a threshold level; however, for inflation rates higher than this threshold level, an increase in the inflation rate significantly reduces economic growth. Moreover, the marginal impact of an increase in the inflation rate in terms of reducing economic growth increases with the rise in the inflation rate, until the inflation rates reach the second threshold level, from which such a marginal effect significantly decreases. These results accord well with recent empirical evidence. Copyright 2008 , Oxford University Press.

Suggested Citation

  • Fu-Sheng Hung, 2008. "Non-productive consumption loans and threshold effects in the inflation-growth relationship," Oxford Economic Papers, Oxford University Press, vol. 60(2), pages 318-342, April.
    • Handle: RePEc:oup:oxecpp:v:60:y:2008:i:2:p:318-342
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    File URL: http://hdl.handle.net/10.1093/oep/gpm036
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    Cited by:

    1. Jesús Crespo Cuaresma & Maria Silgoner, 2014. "Economic Growth and Inflation in Europe: A Tale of Two Thresholds," Journal of Common Market Studies, Wiley Blackwell, vol. 52(4), pages 843-860, July.
    2. Shu-Hua Chen, 2015. "Fiscal and Monetary Policies in a Transactions-Based Endogenous Growth Model with Imperfect Competition," The Japanese Economic Review, Japanese Economic Association, vol. 66(1), pages 89-111, March.
    3. Hiroki Arato, 2009. "Long-run relationship between inflation and growth in a New Keynesian framework," Economics Bulletin, AccessEcon, vol. 29(3), pages 1863-1872.
    4. Phiri, Andrew, 2013. "Inflation and Economic Growth in Zambia: A Threshold Autoregressive (TAR) Econometric Approach," MPRA Paper 52093, University Library of Munich, Germany.
    5. Shu‐Hua Chen, 2018. "The Credit‐Channel Transmission Mechanism And The Nonlinear Growth And Welfare Effects Of Inflation And Taxes," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 724-744, April.

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