Effect of economy on GDP and Inflation
Author: – Sahil Chaubal
Batch: – B
Roll No: – 67
Cyclical and Causal Patterns of Inflation and GDP Growth:
Arai et.al. (2002) examines the relationship between inflation and GDP growth across different countries and time periods. It finds a generally negative link between inflation and growth, but this disappears when Nicaragua is excluded. For OECD countries, inflation was positively linked to growth during the 1960s. The relationship is negative during oil price shocks (1970s, 1990s), but not in the 1960s or 1980s. Using techniques to address indigeneity, the study finds inflation doesn’t significantly harm growth after the 1970s, except in specific periods. It also challenges the view that inflation variability hurts growth, showing no significant effect.
The Correlation Between the Increase Rate of GDP and the Inflation Rate:
Radu, (2007) states thatBased on GDP and inflation, Romania’s economic transition showed a mixed but ultimately improving trend. Between 1990 and 2000, high inflation and declining GDP reflected instability and economic challenges. However, after 2000, GDP growth improved significantly, and inflation rates decreased, indicating a recovery. By 2004, Romania achieved positive economic growth, with GDP rising and inflation falling to 9.3%. This shift suggests that Romania managed to stabilize its economy, moving towards a more sustainable and balanced growth trajectory after overcoming the initial inflationary pressures.
Foreign Institutional Investment and Its Relationship with Various Economic Indicators with Special Reference to Inflation and GDP:
Kashyap, et.al.(2017) explored the relationship between Foreign Institutional Investors (FII) and key economic indicators like GDP and inflation in India. It found that FII plays an important role in India’s financial stability, particularly through enhancing equity capital flows and improving market efficiency. However, the relationship between FII and economic growth is marginally insignificant, with FDI having a more significant impact. While FII is influenced by inflation and exchange rates, it does not have a major effect on these indicators. Overall, FII is beneficial for the country’s growth, but it is not as impactful as FDI in drivingeconomic development.
GDP-Inflation cyclical similarities in the CEE countries and the euro area:
Macchiarelli, Corrado, (2013) says, the analysis reveals that inflation and GDP cycles in the CEECs show varying degrees of synchronization with the euro area. For example, inflation and GDP in Poland, Lithuania, Romania, and Estonia exhibit similar cyclical patterns, with correlation increasing after EU accession in 2004. However, countries like Poland, Hungary, Latvia, and Slovenia show less synchronization, especially in the aftermath of the 2008 financial crisis, when correlations between inflation and GDP weakened. These results suggest that while some CEECs are aligning more with the euro area, others still display significant economic divergence, warranting further exploration of their economic dynamics.
GDP Growth, Decelerating Inflation in U.S. Economic Outlook
Kliesen, (2022)states that U.S. economy faces mixed signals in 2022, with real GDP declining in the first two quarters, but strong job growth and low unemployment indicating a potential recession might not be imminent. Inflation has surged to its highest levels since the 1980s, prompting the Federal Reserve to raise interest rates significantly. Despite the economic slowdown, labour demand remains strong, and many firms are facing difficulties hiring workers. While inflation is expected to decelerate, with forecasts predicting it will fall to 2% over the next few years, GDP growth is projected to remain modest. The economic outlook remains uncertain due to inflation and tightening monetary policy risks.
Management Model of the Correlation Between the Rate of Inflation and the Growth Rate of the GDP
MITRACHE et.al.(2009) examines Romania’s economic transition from 1990 to 2005, showing fluctuations in growth, inflation, and overall economic performance. Nominal GNP increased significantly, from 54.57 billion Lei in 1999 to 287.19 billion Lei in 2005. However, inflation distorted the real growth figures. After adjusting for inflation, real GNP growth was more moderate, with a peak of 9.24% in 2003. From 1999 to 2005, the average real GDP growth rate was 5.72%. Despite nominal growth, issues like corruption, tax evasion, and imbalances in the economy prevented significant improvements in living standards for many Romanians.
Analysis of the interdependence between GDP and Inflation
Anghel & Florin Costel & Mirea, (2017) analyses the Romania’s GDP and inflation data from 1991 to 2016 reveals a clear negative relationship between inflation and GDP. As inflation increases, GDP tends to decrease, showing that high inflation harms economic growth. The regression model used suggests that for every 1% rise in inflation, Romania’s GDP falls by approximately 2.3 billion lei. Despite some years of stable or low inflation (2014-2016), overall, inflation negatively impacted Romania’s economic development. The model’s statistical significance confirms that controlling inflation is crucial for improving the country’s economic performance and ensuring sustainable growth.
Central Bank Independence and Economic Growth of Ghana: What Inflation and GDP Per Capita Growth Rates Matter?
Ding & Asare, (2021) explored the relationship between central bank independence (CBI), GDP growth, and inflation. It highlights how central banks with greater independence often help maintain lower inflation and stable economic growth. The study shows that, in countries like Ghana, central bank independence plays a critical role in reducing inflation without political interference. Additionally, the research suggests that countries with high levels of inflation benefit from a more independent central bank, leading to better economic stability. Central banks with higher independence can better manage inflation and boost GDP growth in both short and long terms.
Higher-Than-Expected Inflation, Delta Variant Could Slow Real GDP Growth
Kliesen, (2021) statesthat U.S. economy is currently experiencing strong growth, job gains, and decreasing unemployment, but rising inflation is a concern. Inflation has increased, and policymakers are monitoring it closely. Despite this, they believe the inflation surge will be temporary. The Federal Reserve is not planning to raise interest rates yet, as it expects GDP growth to continue and inflation to return to the 2% target by 2022. However, if inflation expectations keep rising, the Fed may need to change its approach. The overall outlook remains positive, but uncertainties, like the COVID-19 Delta variant, could impact future decisions.
Lower Inflation, GDP Growth Positive Signs for U.S. Economy
Kliesen, (2023)states that Headline inflation and core inflation have significantly decreased from their 2022 peaks but still exceed the Federal Reserve’s 2% target. The Federal Open Market Committee (FOMC) aims to control inflation without causing a recession, and their strategy is showing positive results. A slowdown in food and energy prices has helped reduce inflation, although core inflation remains a concern. Economic growth continues, aided by expansionary fiscal policies, but they also contribute to higher interest rates and inflation. Forecasters predict slower GDP growth and moderate inflation in the coming year, though the rising federal debt and interest rates remain challenges.
Conclusion: –
In conclusion, the relationship between inflation and GDP growth is complex and varies across different countries and time periods. While inflation often has a negative impact on economic growth, certain factors like fiscal policies, central bank actions, and external shocks can influence this connection. In some cases, inflation and growth may even move in the same direction, especially during periods of economic stability or recovery. Policymakers must carefully manage inflation to ensure sustainable growth, as high inflation can hinder long-term economic performance. Continued monitoring and adaptation of policies will be essential to balancing inflation control with growth objectives.
References
Arai, Mahmood &Kinnwall, Mats &SkogmanThoursie, Peter, 2002. “Cyclical and Causal Patterns of Inflation and GDP Growth,” Research Papers in Economics 2002:5, Stockholm University, Department of Economics.
Assoc. Prof. Ph.D MITRACHE Marius & Ph.D Lect. CRIVEANU RaduCatalin&Ph.D Student, GANEA Mirela, 2009. “Management Model Of The Correlation Between The Rate Of Inflation And The Growth Rate Of The Gdp,” RevistaTinerilorEconomisti (The Young Economists Journal), University of Craiova, Faculty of Economics and Business Administration, vol. 1(12), pages 158-163, April.
Criveanu Radu, 2007. “The Correlation Between The Increase Rate Of Gdp And The Inflation Rate,” RevistaTinerilorEconomisti (The Young Economists Journal), University of Craiova, Faculty of Economics and Business Administration, vol. 1(7), pages 163-168, April.
Guoping Ding & Prince Asare Vitenu-Sackey, 2021. “Central Bank Independence and Economic Growth of Ghana: What Inflation and GDP Per Capita Growth Rates Matter?,” The Economics and Finance Letters, Conscientia Beam, vol. 8(1), pages 104-116.
Kashyap, Suresh Kumar & Thakur, Sakshi, 2017. “Foreign Institutional Investment and Its Relationship With Various Economic Indicators With Special Reference To Inflation and GDP,” Journal of Internet Banking and Commerce, , vol. 22(02), pages 01-12, August.
Kevin L. Kliesen, 2021. “Higher-Than-Expected Inflation, Delta Variant Could Slow Real GDP Growth,” The Regional Economist, Federal Reserve Bank of St. Louis, August.
Kevin L. Kliesen, 2022. “GDP Growth, Decelerating Inflation in U.S. Economic Outlook,” The Regional Economist, Federal Reserve Bank of St. Louis, August.
Kevin L. Kliesen, 2023. “Lower Inflation, GDP Growth Positive Signs for U.S. Economy,” The Regional Economist, Federal Reserve Bank of St. Louis, August.
Macchiarelli, Corrado, 2013. “GDP-Inflation cyclical similarities in the CEE countries and the euro area,” Working Paper Series 1552, European Central Bank
Madalina-Gabriela ANGHEL & Florin Paul Costel LILEA & Maria MIREA, 2017. “Analysis of the interdependence between GDP and Inflation,” Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 65(3), pages 148-155, March