Navigating the Inflation-Growth Nexus: Insights from Threshold Regression Analysis in India

Abstract

Our study delves into a critical aspect of macroeconomic policy by examining the intricate relationship between inflation and economic growth in India. Inflation, as a measure of the general rise in prices of goods and services, has long been recognized as a key determinant of economic performance. However, the precise nature of its impact on economic growth has been a subject of ongoing debate among policymakers and researchers. By employing a threshold regression model, we seek to elucidate the threshold effect of inflation on economic growth, shedding light on the optimal inflation rate conducive to sustainable growth. Our analysis reveals that while moderate levels of inflation may be conducive to economic expansion, excessively high inflation rates can pose significant challenges to growth prospects. This nonlinear relationship underscores the importance of adopting nuanced monetary policies tailored to the prevailing economic conditions. Furthermore, our study contributes to the growing body of literature on inflation dynamics in emerging economies like India. As a rapidly developing economy with unique structural characteristics, India presents an intriguing case study for understanding the interplay between inflation and growth. By identifying the threshold level of inflation and its implications for economic performance, our research provides valuable insights for policymakers tasked with steering the economy on a path of sustainable growth. In addition to its policy implications, our study offers methodological contributions by employing advanced econometric techniques to model the inflation-growth nexus. The use of threshold regression models allows us to capture nonlinearities in the relationship, providing a more nuanced understanding of the dynamics at play. Moreover, our sensitivity analyses confirm the robustness of our findings, enhancing the credibility of our empirical results. Looking ahead, our findings underscore the importance of adopting a proactive approach to inflation management in India. By maintaining inflation levels below the identified threshold, policymakers can create an enabling environment for investment, consumption, and overall economic activity. Moreover, our research highlights the need for ongoing monitoring and assessment of inflationary trends to calibrate monetary policy interventions effectively. In conclusion, our study contributes to the broader discourse on inflation and economic growth by providing empirical evidence of the threshold effect in India. By offering insights into the optimal inflation rate for promoting growth, we aim to inform evidence-based policymaking and foster sustainable economic development in India.