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Relationship Between Inflation and Economic Growth

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Relationship Between Inflation and Economic Growth

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Inflation and Economic Growth in India –An Empirical Analysis

Prasanna V Salian1, Gopakumar. K2

Abstract This paper seeks to examine the relationship between inflation and GDP growth in India. An empirical evidence is obtained from the cointegration and error correction models using annual data collected from the Reserve Bank of India. The result shows that there is a long-run negative relationship between inflation and GDP growth rate in India. Inflation is harmful rather than helpful to growth. These results have important policy implications.

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Indian Economic Service , New Delhi Faculty, BIET-MBA Programme, Davangere, Karnataka.

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I. INTRODUCTION The relationship between inflation and growth remains a controversial one in both theory and empirical findings. Originating in the Latin American context in the 1950s, the issue has generated an enduring debate between structuralists and monetarists. The structuralists believe that inflation is essential for economic growth, whereas the monetarists see inflation as detrimental to economic progress. There are two aspects to this debate: (a) the nature of the relationship if one exists and (b) the direction of causality. Friedman (1973: 41) succinctly summarized the inconclusive nature of the relationship between inflation and economic growth as follows: ―historically, all possible combinations have occurred: inflation with and without development, no inflation with and without development‖.

The impact of inflation on growth, output and productivity has been one of the main issues examined in macroeconomics. Theoretical models in the money and growth literature analyze the impact of inflation on growth focusing on the effects of inflation on the steady state equilibrium of capital per capita and output (e.g., Orphanides and Solow, 1990). There are three possible results regarding the impact of inflation on output and growth: i) none; ii) positive; and iii) negative. Sidrauski (1967) established...