Role of inflation in economic growth of country: a global perspective

Abstract

This paper explores the highly complicated and nonlinear decoding of inflation and economic growth in the global context during the timeframe of 2000–2024, including the pre-pandemic, pandemic, and post-pandemic contexts. The paper uses a quantitative method and adopts secondary data collected by the World Bank and the International Monetary Fund to assess the effect of inflation on the growth of gross domestic product (GDP) and holds other important macroeconomic variables, such as foreign direct investment, trade openness, population growth, and the consumption of renewable energy. The results validate the occurrence of threshold effects, which imply that a moderate amount of inflation can help an economy to grow by increasing consumption, boosting investment, and improving aggregate demand, and high or unstable inflation would kill macroeconomic stability, corrupt purchasing power, and confidence of investors. The findings also indicate a high level of heterogeneity between countries in terms of institutional quality, the development of the financial system, and the credibility of policies. Advanced economies have better abilities to absorb moderate inflation with less significant growth shocks, unlike developing and emerging economies, which are highly vulnerable to external shocks and the volatility of inflation. The COVID-19 pandemic is described as a severe shock of global importance that changed the conventional inflation-growth relationships because of the disruption of supply chains and structural constraints, which revealed the growing significance of global spillovers in an increasingly globalised economy. All in all, it is highlighted in the study that there is a need to develop adaptive, country-specific, and evidence-based policy frameworks that align price stability with long-term growth and sustainability goals. This study integrates international interactions and structural variables to add value to the existing body of knowledge on the nexus of inflation and growth and offer policy implications to address economic resilience in a globalised world.