When Inflation Hurts Growth: Dynamic Panel Threshold Evidence of Inflation's Nonlinear Economic Impact
Keywords:
inflation; economic growth; dynamic panel threshold
Abstract
This study examines the impact of inflation on Indonesia’s economic growth and identifies the inflation threshold affecting the economy. Using an Error Correction Model, results show that inflation and exchange rate depreciation significantly reduce short-term growth. In contrast, the population has a positive and significant impact only in the long term. The inflation threshold is estimated at 8.36% by using Dynamic Panel Threshold; inflation above this threshold harms growth, whereas inflation below it tends to support economic activity. Policy recommendations include coordinated actions between the government and Bank Indonesia to tighten monetary conditions, consider interest-rate adjustments as inflation approaches 5%, and implement stronger measures if inflation exceeds 8.36% to preserve macroeconomic stability and growth.
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Ozdemir, Z. A. (2010). Dynamics of inflation, output growth and their uncertainty in the UK: An empirical analysis. Manchester School. https://doi.org/10.1111/j.1467-9957.2009.02153.x
Runganga, R. (2020). Inflation and Economic Growth in Zimbabwe is there Any Inflation Threshold Level? International Journal of Applied Economics, Finance and Accounting, 8(1). https://doi.org/10.33094/8.2017.2020.81.1.10
Sidrauski, M. (1967). Rational Choice and Patterns of Growth in a Monetary Economy. The American Economic Review. https://doi.org/10.1126/science.151.3712.867-a
Song, Y., Liu, D., & Wang, Q. (2021). The dual-financial-threshold effect in the “club convergence” of economic growth: a dynamic panel threshold model. Empirical Economics, 61(5). https://doi.org/10.1007/s00181-020-01975-4
Talha, M., Sohail, M., Tariq, R., & Ahmad, M. T. (2021). Impact of oil prices, energy consumption and economic growth on the inflation rate in Malaysia. Cuadernos de Economia, 44(124). https://doi.org/10.32826/cude.v1i124.501
Thanh, S. D. (2015). Threshold effects of inflation on growth in the ASEAN-5 countries: A Panel Smooth Transition Regression approach. Journal of Economics, Finance and Administrative Science. https://doi.org/10.1016/j.jefas.2015.01.003
Todaro, M., & Smith, S. C. (2011). Economic Development (11th ed.). In Economic Development.
Tung, L. T., & Thanh, P. T. (2015). Threshold in the relationship between inflation and economic growth: Empirical evidence in Vietnam. Asian Social Science, 11(10). https://doi.org/10.5539/ass.v11n10p105
Vinayagathasan, T. (2013). Inflation and economic growth: A dynamic panel threshold analysis for Asian economies. Journal of Asian Economics. https://doi.org/10.1016/j.asieco.2013.04.001
World Bank. (2017). World Development Indicators 2018. World Bank. https://doi.org/CC BY 3.0 IGO
Aydın, C., Esen, Ö., & Bayrak, M. (2016). Inflation and Economic Growth: A Dynamic Panel Threshold Analysis for Turkish Republics in Transition Process. Procedia - Social and Behavioral Sciences. https://doi.org/10.1016/j.sbspro.2016.07.129
Batrancea, L. (2021). Empirical Evidence Regarding the Impact of Economic Growth and Inflation on Economic Sentiment and Household Consumption. Journal of Risk and Financial Management, 14(7). https://doi.org/10.3390/jrfm14070336
Behera, J. (2014). Inflation and its Impact on Economic Growth: Evidence from Six South Asian Countries. ISSN.
Benhabib, J., & Spiegel, M. M. (2009). Moderate inflation and the deflation-depression link. Journal of Money, Credit and Banking. https://doi.org/10.1111/j.1538-4616.2009.00232.x
Bick, A. (2010). Threshold effects of inflation on economic growth in developing countries. Economics Letters, 108(2). https://doi.org/10.1016/j.econlet.2010.04.040
Cameron, N., Hum, D., & Simpson, W. (1996). Stylized Facts and Stylized Illusions: Inflation and Productivity Revisited. The Canadian Journal of Economics. https://doi.org/10.2307/136156
Cili, M. R., & Alkhaliq, B. (2022). Economic Growth and Inflation: Evidence from Indonesia. Signifikan: Jurnal Ilmu Ekonomi, 11(1). https://doi.org/10.15408/sjie.v11i1.19848
Fei, C. J., Kun, S. S., & Ismail, M. T. (2019). Threshold Effects of Inflation on Economic Growth: Evidence from Dynamic Panel Threshold Regression Analysis for 18 Developed Economies. Journal of Management, Economics, and Industrial Organization. https://doi.org/10.31039/jomeino.2019.3.1.4
Gillman, M., & Harris, M. N. (2010). The effect of inflation on growth. Economics of Transition. https://doi.org/10.1111/j.1468-0351.2009.00389.x
Ho, S. H., & Saadaoui, J. (2022). Bank credit and economic growth: A dynamic threshold panel model for ASEAN countries. International Economics, 170. https://doi.org/10.1016/j.inteco.2022.03.001
Hung, L. D. (2024). Economic Growth and Inflation Tradeoffs within Global Stagflation: Evidence from the Vietnam Economy. Journal of International Commerce, Economics and Policy, 15(2). https://doi.org/10.1142/S1793993324500054
Khan, M. S., & Senhadji, A. S. (2001). Threshold effects in the relationship between inflation and growth. IMF Staff Papers. https://doi.org/10.5089/9781451853339.001
Khan, S., & Pazir, D. (2023). Innovation, Economic Growth, and Inequalities: A Panel Dynamic Threshold Analysis for Dynamic Economies. Annals of Financial Economics, 18(3). https://doi.org/10.1142/S2010495223500045
Kremer, S., Bick, A., & Nautz, D. (2013). Inflation and growth: New evidence from a dynamic panel threshold analysis. Empirical Economics. https://doi.org/10.1007/s00181-012-0553-9
Lay, S. H. (2020). Bank credit and economic growth: Short-run evidence from a dynamic threshold panel model. Economics Letters, 192. https://doi.org/10.1016/j.econlet.2020.109231
Liang, S. (2023). The Concept of Threshold Inflation and How Threshold Inflation Relates to Economic Growth. Advances in Economics, Management and Political Sciences, 11(1). https://doi.org/10.54254/2754-1169/11/20230517
Loi, H., & Abou-Zaid, A. S. (2016). Inflation and Growth: An Estimate of the Threshold Level of Inflation in the U.S. IOSR Journal of Economics and Finance.
Mamo, F. T. (2012). Economic Growth and Inflation A panel data analysis. Economics.
Mankiw, N. G., Phelps, E. S., & Romer, P. M. (1995). The Growth of Nations. Brookings Papers on Economic Activity. https://doi.org/10.2307/2534576
Matte, R. (2019). Inflation Thresholds, Economic Growth and Investment Planning In Uganda. Economics, Law and Policy, 2(1). https://doi.org/10.22158/elp.v2n1p55
Mubarik, Y. A. (2005). Inflation and Growth: An Estimate of the Threshold Level of Inflation in Pakistan. SBP-Research Bulletin.
Munir, Q., & Mansur, K. (2009). Non-linearity between inflation rate and GDP growth in Malaysia. Economics Bulletin.
Munyeka, W. (2014). The relationship between economic growth and inflation in the South African economy. Mediterranean Journal of Social Sciences, 5(15). https://doi.org/10.5901/mjss.2014.v5n15p119
Ndoricimpa, A. (2017). Threshold Effects of Inflation on Economic Growth: Is Africa Different? International Economic Journal, 31(4). https://doi.org/10.1080/10168737.2017.1380679
Nguyen, C. P., Le, T. H., & Su, T. D. (2020). Economic policy uncertainty and credit growth: Evidence from a global sample. Research in International Business and Finance, 51. https://doi.org/10.1016/j.ribaf.2019.101118
Niken, K., Haile, M. A., & Berecha, A. (2023). On the nexus of inflation, unemployment, and economic growth in Ethiopia. Heliyon, 9(4). https://doi.org/10.1016/j.heliyon.2023.e15271
Ozdemir, Z. A. (2010). Dynamics of inflation, output growth and their uncertainty in the UK: An empirical analysis. Manchester School. https://doi.org/10.1111/j.1467-9957.2009.02153.x
Runganga, R. (2020). Inflation and Economic Growth in Zimbabwe is there Any Inflation Threshold Level? International Journal of Applied Economics, Finance and Accounting, 8(1). https://doi.org/10.33094/8.2017.2020.81.1.10
Sidrauski, M. (1967). Rational Choice and Patterns of Growth in a Monetary Economy. The American Economic Review. https://doi.org/10.1126/science.151.3712.867-a
Song, Y., Liu, D., & Wang, Q. (2021). The dual-financial-threshold effect in the “club convergence” of economic growth: a dynamic panel threshold model. Empirical Economics, 61(5). https://doi.org/10.1007/s00181-020-01975-4
Talha, M., Sohail, M., Tariq, R., & Ahmad, M. T. (2021). Impact of oil prices, energy consumption and economic growth on the inflation rate in Malaysia. Cuadernos de Economia, 44(124). https://doi.org/10.32826/cude.v1i124.501
Thanh, S. D. (2015). Threshold effects of inflation on growth in the ASEAN-5 countries: A Panel Smooth Transition Regression approach. Journal of Economics, Finance and Administrative Science. https://doi.org/10.1016/j.jefas.2015.01.003
Todaro, M., & Smith, S. C. (2011). Economic Development (11th ed.). In Economic Development.
Tung, L. T., & Thanh, P. T. (2015). Threshold in the relationship between inflation and economic growth: Empirical evidence in Vietnam. Asian Social Science, 11(10). https://doi.org/10.5539/ass.v11n10p105
Vinayagathasan, T. (2013). Inflation and economic growth: A dynamic panel threshold analysis for Asian economies. Journal of Asian Economics. https://doi.org/10.1016/j.asieco.2013.04.001
World Bank. (2017). World Development Indicators 2018. World Bank. https://doi.org/CC BY 3.0 IGO
Published
2026-06-27
How to Cite
Esti Pasaribu. (2026). When Inflation Hurts Growth: Dynamic Panel Threshold Evidence of Inflation’s Nonlinear Economic Impact. International Journal of Economics, Business and Innovation Research, 5(04), 2414-2428. https://doi.org/10.63922/ijebir.v5i04.4402
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