Earlier today President Trump, Vice-President Pence and NEC Chairman Larry Kudlow delivered remarks on the economy from the South Lawn of the White House: . [Transcript] South Lawn – 9:43 A.M. EDT – THE PRESIDENT: Good morning. Moments ago, the numbers for America’s economic growth — or GDP — were just released. And I am […]
ICBFEM 2018 : Business, Finance, Economics and Management Paris, France October 29 – 30, 2018 http://ow.ly/wZvb30jQMr4
Nowadays, the interrelationship between growth and inflation is an important topic in macroeconomics. There is a significant consensus among economists that one of the fundamental perspectives of macroeconomics is to sustain high economic growth simultaneous with such low inflation. However, still today there is a considerable controversy and debate on the nature and impact of the inflation and growth relationship.
The definitions linked between inflation and the amount of money has been shaped differently with the financial crisis the economist had thought to expend the definition of inflation by convincingly introducing other factors alongside with cash, for example, a lack of supply of goods. Although there were many concepts around inflation thus, I want to focus here the definition which has been provided by Emile James that says the inflation is slightly a constant upward movement of the prices of goods caused by an excess in demand that exert an excess of supply capacity. Moreover, the economists, econometrician, policymakers and central bankers have quite often make an accent on the costs related to the high and variable inflation. Most of the time Inflation introduce such negative externalities on the economy as a whole mostly when it intervenes with an economy’s efficiency. A clear Example of these inefficiencies are not difficult to find and grasp, at least at the theoretical stage. The impact of Inflation can profoundly lead to uncertainty and perplexity about the future outcomes and the return of the investment projects (exclusively when high-level inflation is also linked with an increased in the variability of price). As a result, this always leads to more and more conservative investment strategies that should not take place, Consequently its lower the investment level and the economic growth. Inflation may to some extent reduce a country’s competitiveness at the international level, by making its exports costlier. However, inflation can always interact with the tax system in order to distort the decision of borrowing and lending.
When we look at the impact of Inflation we understand that it creates more worry and burdens not only on the cost of living but also makes the life of people more mournful. Moreover, as we know inflation leads to uncertainty and ambiguity about the future outcomes of any investment projects particularly, whichever have such a long gestation period. The increased in the variability of price may to some extent lead to an increase in the cost of production and obviously a less return. Whenever there is a breakthrough in the structure of cost and price level, the competitiveness in the international level of the country also may be adversely influenced. In that specific country the export prices also may become relatively more expensive than the prices of the competitors, Hence, adversely influenced the balance of payments. The inflation weakens the confidence of foreign investors and domestic regarding the future course of monetary policy. The interrelationship between inflation and economic growth is of great interest in monetary modelling and macroeconomics. Even though the rapport between the inflation rate and economic growth has been studied seriously, nevertheless the precise relationship is not well explained. The differences in the application of inflation and growth seem to be a result of diverse data sets, the different methodologies employed and specific country characteristics.
- The relationship between inflation and economic growth: a theoretical framework
Inflation can be described as the regular increase in the general level of prices of services and goods over time or, more clearly, as a great amount of money chasing too few goods. Inflationary periods bring about a steady decline in the economic growth and the purchasing Inflation. In fact, most central banks’ monetary policies aim to maintain a high economic growth and low inflation rate. The economy is drastically affected by a very high inflation, but some evidence clearly proves that moderate inflation might also influence the output growth in the long run. There is no advantage in lowering inflation towards zero. As I have read Adam Smith propound the classical theory that assumes there are
three factors of production: Capital, labour and land. As always, the most important considered determinant of economic growth is savings. There is no direct correlation between inflation and its tax effect on the output and profit level. The classical economic theory states that employment and output not are determined by the creation of money but the short‑run production function of Capital and labour, for instance: Y= fA (L, K), where Y is obviously the output, K is accumulated capital, A is the level of technology and L is the labour force. Consequently, the economic growth can be obtained only if the capital cumulation or labour force rises with a to prevent some diminishing returns in the level of technology-induced by an increase in the labour force or capital. However, investment is the unique determinant of economic growth, which is affected by savings. The interest rate is reduced by an increase by savings, hence increasing investment, to balance out the diminution in consumption due to such higher levels of savings. However, a decrease in savings will raise the interest rate and decrease investment, and hence depress economic growth. It always states that money does not influence real variables as such in the long run but can fix price levels in an economy. Even though the interrelationship between economic growth and inflation is not clearly stated in the classical theory of growth, it is implicitly alleged that there is a significant negative relationship between the two variables. Particularly, it encourages borrowing and discourages saving, which increases the nominal interest rate. An increase in the nominal interest rate, in turn, discourages growth and discourages investment. In order to enhance economic growth, the conventional view on inflation holds that inflation should be moderate and stable but not too high. When the level is at lower rates the inflation‑growth relationship can also be affected by other macroeconomic variables and hence at that specific moment the marginal effect of inflation on growth is stronger (e.g., The degree of financial development, trade openness, and public expenditure). There is still a huge controversy about the specific threshold level of Economic growth and inflation…The non‑linear relationship as mentioned is sensitive to different methodologies, (developed countries and developing).
3.THE DRIVING FORCES OF ECONOMIC GROWTH
THE DETERMINANTS OF ECONOMIC GROWTH
Basic determinants of growth: the accumulation of physical and human capital
- a) The accumulation of physical capital
One of the principal factors of determining the level of real output per capita is the rate of accumulation of physical capital even though, its real effects could be more or less permanent determined by some extent to which technological innovation is incorporate in new capital. Whatsoever the passing mechanism from capital accumulation to growth, the considerable differences in the investment rate throughout countries and over time point to it as a possible source of cross-country disparities in output per capita.
- b) Human capital
The formal experience and skills embodied in the labour force correspond to a form of human capital. Additionally, it could be argued that human capital is contingent upon some kind of lowering returns so that a more skilled and trained workforce would enjoy higher levels of income in the long term. However, investing in human capital (for example: training and expenditures on education) would have a more lasting impact on the growth process if training and high skills go hand-in-hand with more development and intensive research and a faster rate of technological progress, or even if the adoption of new technology is facilitated by a highly skilled workforce.
- c) Research and development
To some extent, Expenditure on development and research (R&D) can be designed as an investment in knowledge that translates into new technology as well as more powerful ways of using existing, resources of human capital and physical.
4) Macroeconomic policy setting and growth
When it comes to macroeconomic and more precisely in the context of growth studies, I think that there are three points that should be generally considered with respect to macroeconomic policy settings: maintaining low inflation and the impact of government deficits on private investment and the benefits of establishing, and the possibility of negative impacts on growth stemming from a too-large government sector.
5) Fiscal policy and growth
The Fiscal policy settings can affect growth and output over the business cycle as well as in the medium term. In particular, where government deficits finance transfers or consumption, a conventional argument for prudent policy is to always decrease the crowding out effect on private sector investment.
6) International trade and growth
Apart from the benefits of making use of comparative advantages, theories have propounded additional benefits from trade arising through economies of scale, exposure to competition and the diffusion of knowledge and exposure to competition. These could result both in possibly a higher level of investment (for example if the adoption of foreign technologies demands investment in new types of capital) and higher overall efficiency.
7) The econometric technique
The main benefit of pooled cross-country time-series data for the analysis of not only growth equations and inflation is that the country-specific effects can be monitored. However, this tool most of the time imposes a homogeneity of all slope coefficients, knowing that only the intercepts may vary across countries. The persuasiveness of this approach relies critically on the assumption of a standard convergence parameter and a common growth rate of technology.
8) What Level of Inflation is Harmful to Growth?
As I have seen the literature has tried to reply to the question concerning the level at which inflation starts suppressing long‑run growth regarding sensitivity and threshold. Most of the empirical studies that I have read have asserted the non‑linear and negative impact of inflation, especially, beyond a certain threshold level.
9) Proposed solutions for inflation in developing countries and approaching the problems of inflation?
Actually, High Inflation is a standard feature in most of the developing countries that have a significant and long-term negative impact on growth. Inflation can be systematically approached in these following ways:
- Private-sector should be given prominence in economic growth and Public-Sector Units should be completely sold out. Generally speaking, the private sector performs better than the public sector when it comes to effectiveness and efficiency. Therefore, I think the private sector under proper and reasonable competition and regulation would be able to provide services and goods at lower prices and that will certainly keep the inflation at a low level.
- The Foreign investment must be accepted in all sectors of the economy. Foreign investors will bring capital as well as much better business practices and technologies, that will obviously lead to the availability of goods and services at lower prices.
- The government should focus only on creating human and physical infrastructure. The government should refrain from unnecessarily intervening in the marketplace. Good quality of physical and human infrastructure will help the country in moving the production cost.
- The wasteful expenditure will certainly force the government to run a higher level of fiscal deficit and revenue. The government will definitely borrow more from the market in order to crowd out the much-needed private investment.
- The Bad fiscal policies will obligate the central bank to print more and more money to lend it out to the government. The government will keep vesting this money in numerous productive project. Both monitory policies and fiscal will be expansionary in nature and raise the money supply into the economy, pushing up the demand for certain goods without increasing the supply of goods and services. This disproportion in demand and supply will definitely push the prices up.
- Apart from what I have mentioned above, the rampant and impetuous corruption in developing countries is mainly responsible for inflation. Money collected through public debts, taxes and aids from IMF and WB is generally not wisely efficiently used. Political permanently and constantly are involved and indulge in a large scale of corruption and syphon off the money from the economic system. consequently, the economy is not capable of growing at his full potential as it ought to and the equilibrium of demand and supply mismatch emerges. Hence corruption in public sector and government must be stopped at all cost. There is no other alternative.
- The government must invest and encourage in Research & Development. Also, reinforce an Innovative process and supplicated goods and services that may help in driving down the production cost lower.
10) Descriptive statistics
Table 1: Descriptive Statistics of Inflation and Growth
Results and Discussion
To get a broad picture of both inflation and growth, descriptive statistics are estimated for 2010 to 2017 in the Democratic Republic of Congo. Table 1 shows that the mean values of inflation and growth are 143.4840 and 988191.8. It is also evident from Table 1 that the standard deviation of inflation and growth are 57.96911 and 4,637,118.2. The value of inflation variable ranged from 40.4 to 167.3, whereas the value of growth variable ranged from Rs. 467,139 to. 1,675,505. The Economic growth rate (y) is calculated from the difference of logs of growth. Equivalently, inflation rates (p) are calculated from the difference of logs of WPI (1993=100).
The results of the cointegration test have attested the fact that the two variables of inflation and growth are not cointegrated. Hence, it is quite evident that there is no long-run relationship between these two variables DR of Congo. It is really clear from this study that since the growth of the economy is not related to inflation, acceleration of growth should be focused forever as one of the foremost economic objectives of the nation. However, inflation may take place due to the supply side and demand side factors. Aside from these, the monetary factors and the international factors also may lead to inflation. Based on the circumstances, the government has to take the timely measures to control the inflation in order to maintain economic stability in the economy.
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