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The impact of inflation on above threshold of economic growth Zahra Parsaeian(corresponding author) Department of Economic, Yazd science and Research Branch, Islamic Azad University, Yazd, Iran.

Abstract Inflation is one of the crucial variables in the economy as inflation control by any government is one of the basic criteria of government efficiency and the other macroeconomic variables. In this context, the aim of this study was to calculate the threshold level of inflation and evaluate the impact of inflation on economic growth in the economy is determined. Statistics quarterly survey data from 1992 to 2010 have been compiled by the World Bank and the econometric model used is a threshold vector regression model. The model equations in terms of economic growth and inflation in the regime as a regime (inflation below the threshold level) and the two (inflation above the threshold level) was conducted to examine the relationship between inflation and economic growth. The results show that the calculated threshold value of inflation in Iran is estimated to be 71/7. An equation of the GDP, the inflation differential in the first and third interrupt and in the second interval negative and positive relationship with economic growth. The inflation differential only in the first interval is significant. This suggests that when inflation is lower than a threshold value (a regime) inflation variable with an interval can have a significant effect on economic growth. Keywords: Ahead of inflation, GDP, the TVAR, economic growth Introduction Including macroeconomic objectives of economic topics is achieve high and stable economic growth, lower inflation, full employment and the fair distribution of income in the country. inflation is important economic phenomena and imposes high costs on society. The effects of inflation can be traced to redistribution of income in favor of the property owners and investors and the detriment of employees and workers, increasing instability in the macro economy and thus a shortened of decisions time horizon and long-term investment and other factors.(Peraee and Dadvar.2011)

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Inflation is one of the crucial variables in the economy, as inflation control by the government is one of the basic criteria of effective state to be considered and always one of the slogans is the inflation. Inflation can change distribution of wealth and the widening gap between advantageous the capitalist and prosperous people and when there's accelerated inflation by create uncertainty in relative prices reduce production and investment levels. However, gentle and quiet inflation as a reward for the investor because they have seen an increase in fixed assets, and the investment will lead to increased motivation. So helpful or harmful effects of inflation depends on its size.( Dashtee, 2007) Economic instability can have different origins and causes: Poor macroeconomic policies and cross-sectional policies to solve everyday problems and consequent structure of the economic malaise could lead to uncertainty for decisions. Exogenous shocks, the lack of a reliable and stable currency and Therefore, trade turbulence and high and volatile inflation, exchange rate fluctuations, oil prices (especially oil-exporting countries) and ineffective fiscal and monetary policy, undermining the functioning of the price system broadly speaking, the process and decision making economic agents to cause adverse conditions could cause instability and economic uncertainty. The lack of price stability and inflation can be as one of the most important economic variables have a profound impact on economic growth and GDP.( Fountas at el 2002) Statement of problem Relationship between inflation and economic growth in different countries has always been a discussion topic among economists and is different theoretical and empirical issues in this domain . study of many of these issues shows that can not a definite conclusion about the effect of inflation on economic growth can be achieved and This is for every country depending on the conditions and characteristics. However, in most studies, the conclusion is reached that high levels of inflation is negative and sustainable effects on economic growth. So, in recent years central banks have an increasing emphasis on price stability, and monetary policies have been applied to low and stable inflation , To prevent the imposition of higher inflation, because of the perception that inflation has a significant cost, some of the costs associated with the average inflation rate and another variability associated with uncertainty of inflation. COPY RIGHT © 2014 Institute of Interdisciplinary Business Research

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In response to the question of inflation whether the impact on each country's economic growth, it can be stated that this depends on the economic structure of each country . For this reason, the assessment of a country's economic growth, the effects of inflation on growth as one of the factors that affect the economic growth is important.(Mahmoodi Nia At El 2012) In recent decades, economists have concluded that moderate levels of inflation can contribute to economic growth. The purpose of this level of inflation is not the price high level , causing uncertainty in the economy and hinder the proper functioning of the economy.( Coibion At El,2011) It seeks to bring these questions: What is the optimal amount of inflation too? How much of the inflation hinders economic growth?( Mubarik,2005) Is inflation must get to zero? The low inflation rate can be increased to a positive relationship between inflation and economic growth, but high rates of inflation, there is a negative relationship between these two variables. Literature Hasanov(2011) In a study to investigate the possibility of effect of an inflation threshold on economic growth in Azerbaijani economy during the years 2009-2000 was conducted using a threshold model. estimation results show that the between economic growth and inflation in Azerbaijan there is a non-linear relationship and inflation threshold level on economic growth is 13%. Inflation below the threshold level for is a significant and positive impact on economic growth, But this positive relationship will be negative when inflation is more than 13% and economic growth is expected to be approximately 3% as reduced, It is possible for the financial politicians on the eve of keeping inflation below 13 percent for proof of a negative impact on economic growth will be useful. Kremer At El(2011) In a study examining the relationship between inflation and economic growth has been investigated using a dynamic panel threshold model. This paper presents gives new evidence on the nonlinear relationship between inflation and economic growth over the long term , let the order according to the model of Connor Hansen is provided dynamic threshold model the director of endogenous enables the adjustment panel. Empirical analysis on a large panel data set includes 124 countries. The results showed that there is a basic difference between industrial and nonCOPY RIGHT © 2014 Institute of Interdisciplinary Business Research

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industrial countries, such that the estimated inflation threshold in industrial countries is 5/2% . Inflation rates less than or greater than 5/2% associated with more or less of long-term economic growth of the industrialized countries. Ahead of inflation in developing countries is estimated 2/17%. inflation rates above this critical value if very high is associated with lower economic growth and other major industrialized nations. In contrast, when inflation is less than 2/17% is no significant relationship between inflation and economic growth in developing countries. Qazunee (2012) in a paper investigates the effects of inflation threshold on economic growth is discussed. Achieve to this activity, the non-linearity of the relationship between inflation and economic growth is examined with the help of a dynamic panel threshold model. And illustrate the importance of non-linearity of the relationship between inflation and growth. The research in 19 countries in the MENA region has been named as an economic block, using annual data for the years 1961-2010 was conducted. Experimental results show that the inflation above threshold level of10% the threshold was statistically confirmed and interpreted as the critical level is negative and significant impact on economic growth. Mandler(2012) In another study by using the threshold autoregressive is examined Effectiveness of monetary shocks policy on inflation regimes in the United States in the period 2007-1965. And has stated that the effects of monetary policy are different for different inflationary regimes. So in terms of low inflation, inflation tends to reduce the price puzzle and , but in terms of high inflation monetary policy is crucial. Vinayagathasan(2013) Study to investigate the threshold levels of inflation and how the level of economic growth in Asia using dynamic panel focused on the brink of a recursive process. The results indicate a non-linear relationship between inflation and economic growth in 32 Asian countries over the period 1980 to 2009. The inflation threshold is approximately 43/5%, with a significant percentage detected and indicate when inflation is more than 43/5% harms economic growth, but below the surface there is no impact on economic growth. Amisano, Gianni(2013) in a study is studiedd money growth and inflation by using a regime switching approach. . Thus, in this study using a Markov switching model , inflation properties in two regime of high inflation and low and related changes in the monetary policy regime is studied. This study COPY RIGHT © 2014 Institute of Interdisciplinary Business Research

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uses data from the 1960 period the Europe Union countries. The results presented in this study are that monetary growth as a threat to price stability. Tehranchian At El(2013) Research has focused on testing the stability of inflation in Iran . For this purpose, according to the inflation rate of the time series data (2011-1962), the moving average cumulative fractional regression model is used. The results of this study show that the method of maximum likelihood and maximum likelihood adjusted, build up or difference of the order are d1 =0/ 482 and d2 =0/483 So based on the above findings, the inflation persistence hypothesis is not rejected in Iran. Due to the gradual liquidation, the impact of inflationary shocks, it is possible to structural inflation and observe of monetary discipline, the most important recommendations of this study are considered. Research hypotheses According to the research objectives, the following hypotheses were investigated in this study are: 1 above Inflation the threshold level of inflation reduces economic growth. The population In this study, survey data on macroeconomic variables are including economic growth, inflation, GDP, money supply, consumer price index and the price index implicit deflator exchange rates. . The data are quarterly data (2011: 4-1992). It should be noted that all data were collected from the World Bank (WDI). Research Tools Given that this study is empirical and application requires the use of empirical data. The data collected in this study is based on a library method. Details of the study based on economic data of period 1992 to 2011 that has been collected from the World Bank or the Central Bank of Iran. All statistical analyzes in this study is performed by using the software package Eviews.

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Data and Variables The survey data are quarterly data from 1992 to 2011 cover. Data is such as inflation (INF) and gross domestic product (GDP). It should be noted that all data from the World Bank (WDI) were collected. Table 1: The research variables (World Bank) ROW VARIABLE

SIGN

1

GROSS DOMESTIC PRODUCT

GDP

2

INFLATION

INF

TYPE OF VARIABLE THE DEPENDENT VARIABLE INDEPENDENT VARIABLE

Unit Root Test Using OLS estimation of the empirical work on the assumption that the time series variables are used by Mana. On the other hand, the prevailing belief is that many time series variables is in Mana economic. The importance of time-series models and models are based on VAR which the convergence of such models is very important. Because if the variables used in time-series models are not viable, then the model does not satisfy the stability condition, Therefore, before using these variables is necessary to ensure that the variables of Manaei. Different tests are done to check Manaei variables in the Phillips Perron unit root model is referred. Model Research Model of study is threshold vector autoregressive (TVAR) and data such as gross domestic product (GDP) as dependent variables and inflation (INF) as independent variables. Equation 1, Equation is (GDPR) and the corresponding equation (INF) each of the variables in the model with three lags is that their results are given in detail in the following chapters. Implicit relationships in Equation 1 and 2 are shown. GDPR =f (GDPRt-1, GDPRt-2, GDPRt-3, inft-1, inft-2, inft-3) INF =f (GDPRt-1, GDPRt-2, GDPRt-3, inft-1, inft-2, inft-3) Statistical Analysis Evaluation of variables Continuing is discussed the trend of the main variables of the model . The economic variables are shown in Figure 1. This chart is known as the largest COPY RIGHT © 2014 Institute of Interdisciplinary Business Research

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economy in the years 1976 and minimal is 1980. This review of varies show damping a lot during the years. In recent years the trend of declining economic growth in 2011 was about zero.

Figure 1: The process of economic growth in 2011 years Figure 2 shows the rate of inflation in 40 years. The lowest rate of inflation is for the year 1371 and the highest in 1995 with 49 percent. In recent years, inflation has experienced a growing trend.

Figure 3 shows Change in GDP at constant prices between 1371-2011. The rise of world oil prices in the early 50 GDP increased and during the years of COPY RIGHT © 2014 Institute of Interdisciplinary Business Research

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revolution and war has been decreasing. After the Reconstruction era of the late 60 GDP has risen and has experienced an increasing trend. The slope of decline in recent years and in 2011, a slight increase in GDP can be seen.

Test of variables Unit root Table 1 shows the results of unit root test of inflation and economic growth variables. Results show that 95% of all variables is in stationary levels and in other words, all the variables in Model I (0), respectively. Software output of unit root tests are given in the Appendix. Table 1: Results of Unit Root Test Prob 0.0000 0.0001 0.0000 0.0001

t -5/1855 -17/9707 -8/2515 -13/8240

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variable Inf GDPr Exg M2g

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Inflation and growth dynamics In this section, using a threshold approach examined dynamic effects of inflation on economic growth. To ensure the existence of such effects in a VAR model of the likelihood ratio test Hansen (1991) has been proposed by Lu and Zivoot.

VAR model to test the linear VAR model with one or two thresholds This test is an extension of multivariate linear test of Hansen (1991) has been proposed by Lu and Zivoot. The results shows that there is a linear VAR model to a VAR model with a threshold rejection threshold is confirm the existence of two thresholds. Therefore investigated the relationship between inflation and growth dynamics in terms of a threshold VAR model with a threshold is superior to the linear VAR.

Table 2: there is a threshold test on the VAR model Statistics LR

23.7266**

sig )0.000(

5% level of significance **

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LR test for the presence of a threshold or thresholds specified the VAR model is presented in Fig.

0.10

Asymptotic Chi 2 Bootstrap Test value

0.00

Density

0.20

Test linear VAR vs 1 threshold TVAR

0

5

10

15

20

25

LRtest12

0.06

Asymptotic Chi 2 Bootstrap Test value

0.00

Density

0.12

Test linear VAR vs 2 thresholds TVAR

0

10

20

30

40

LRtest13

LR test to study the linear VAR against TVAR a threshold, and two threshold The results of estimating a threshold VAR model Threshold VAR model helps us to discussed to establish a causal relationship between economic growth and inflation rate variables in different regimes . . For the purposes of this section, the four-variable threshold model, three variables and bivariate relationship between variables are used. As the results in Table 3 show, the equation GDPR none of Coefficients variables are not significant. The exchange rate of the model have been removed and the link between monetary variables, inflation and GDP will be discussed. Table 3: Estimation results VAR model with four variable threshold COPY RIGHT © 2014 Institute of Interdisciplinary Business Research

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regime I GDPR

Inf

MR

EXGR

0.0682* 3.9438*** 0.0776*** 0.0197 )0.0206( )0.0312( )0.8632( )0.0158( -0.2339 -0.3573 -.00843* -0.0468 GDPR )0.1256( )3.4789( )0.0405( )0.0830( -0.0085 0.4244* -.000089 0.0048 INF )0.0022( )0.0045( )0.0068( )0.1886( -0.4426 -24.3642* -.2690* -0.3270 MR )0.3894( )10.7875( )0.1255( )0.2574( -0.1089 0.3496* 0.0779 1.0222 EXGR )0.2486( )6.8864( )0.0801( )0.1643( Table 4 presents the estimation results of the model with three variables suggests that despite the changing amount of money, inflation and GDP variables in Eq GDPR money and inflation are not significantly and GDPR is affected GDP with only two interruptions . Since the main objective of this research is to investigate the causality between GDP and inflation that's why the monetary variables have been removed from the model and the model with are estimated with inflation and GDP variables. Table 4: Estimation results VAR models of three Variable threshold C

Regime I GDPR

Inf

MR

GDPRt-1

0.0354 )0.0323( -0.3681*** )0.0937(

5.8485 )0.9886( -1.8872 )2.8694(

0.0602*** )0.0128( -0.0630 )0.0373(

GDPRt-2

-0.7502*** )0.1013(

-2.0452 )3.1012(

0.0943* )0.0403(

INF t-1

-0.0040 )0.0046(

.4776 )0.1422(

.0018 ).0018(

-0.0007 )0.0032( -0.4002 )0.2770( 0.4828 )0.2873(

-0.0490 )0.0983( -39.7629*** )8.4828( )-16.2422 8.7970(

-0.0040** )0.0013( -0.2935* )0.1103( 0.4086*** )0.1143(

C

INFt-2 MR t-1 MR t-2

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For the purposes of this section, a bivariate threshold model is used to examine relationships between variables. Results for threshold VAR model is given in Table 5.

Table 5: Estimation results of bivariate VAR model threshold GDPR Vaiable C GDPRt-1 GDPRt-2 GDPRt-3 inft-1 inft-2 inft-3

Inf I Regime

0.0646*** )0.0158( -0.8229*** )0.0865( -0.9545*** )0.0746( -0.7278*** )0.0890( -.0763* )0.0031( 0.0050 )0.0022( -0.0002 )0.0020(

2.3099** )0.769( -4.0165 )4.1667( 1.2445 )3.6313( -6.0054*** )4.3337( 0.3117* )0.1505( -0.1620 )0.1068( 0.3024** )0.0959(

According to the results, the calculated threshold value of inflation in Iran is estimated to be 71/7. The 7/88% of observations in regime (inflation below the threshold level). As the results in Table 5 show that, under the GDP equation, the coefficient of the inflation variable at first and third lags are negative relationship and in the second interval is positive relationship with economic growth. The inflation differential is significant only in the first interval. This suggests that when inflation is lower than a threshold value (regime) variable inflation with a lag can have a significant effect on economic growth.

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20

Threshold variable used

0

5

10

15

th 1

0

10

20

30

40

50

60

70

50

60

70

Time

20

Ordered threshold variable

0

5

10

15

trim= 0.1 th 1

0

10

20

30

40

480

Threshold Delay 1 th 1

440

SSR

520

Results of the grid search

2

3

4

5

6

7

8

Threshold Value

In Figure 5 is shown the calculated changes in inflation over the threshold value (71/7). As the chart above the level of inflation during the period 1992 2010 has been a lot of volatility, the highest level of inflation in the year 1994 and is the lowest level of inflation in 2004. In 2004, only 4 levels of COPY RIGHT © 2014 Institute of Interdisciplinary Business Research

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inflation will be calculated according to the threshold level. During the period 1992 - 1995, inflation is above the threshold level varies, but from 1996 onwards, the inflation rate is below the threshold level of inflation. Suggestions The results, given that the relationship between inflation and economic growth and inflation regimes threshold models evaluated together, Take a step forward compared to previous studies. The sensitivity of the economy macroeconomic indicators such as inflation and the price index and the price is revealed in the community and the lives of people, recognizes the importance of further investigation in the future. Also, due to the chronic problem during the course of the Iranian economy with inflation and inflationary shocks were felt need for further studies in this field. It is recommended that future studies seeking to enter the inflation and economic growth have able to identify other factors affecting these parameters also policies and principles relating to control inflation and influence the development in the country. It also recommended that future studies are used time-series models to examine relationships between variables. Also, the research data also suggest that as the basis for their research, other than information sources such other sources of information as the World Bank, Central Bank and statistics are used internally. And a comparison between the data and the difference between the internal and external data done. Course examines the rise and 30 years old or more (depending on the availability of data) is selected to ensure more accurate results and a more reliable.

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References Amisano, G. & Fagan, G. (2013). Money growth and inflation: A regime switching approach, journal of international money and finance ,Volume 33, pp: 118–145. Coibion, O. , Gorodnichenko, Y. & Wieland, J. (2011). The Optimal Inflation Rate in New Keynesian Models:Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?, working paper. Dashti, SA. (2007). Relationship between inflation and economic growth in Iran. Bureau of Economic Research, Department of Macroeconomics, 20-6. Fountas, S. , Karanasos, M. & Kim, J. (2002). Inflation and output growth uncertainty and their relationship with inflation and output growth. Economics Letters, 75 (3), 293301. Hasanov, F. (2011). Relationship between inflation and economic growth in Azerbaijani economy: is there any threshold effect?, Institute for Scientific Research on Economic Reforms, Ministry of Economic Development of the Republic of Azerbaijan, MPRA Paper No. 33494.

Mahmoodi Nia, D., Jafari, S, Goodarzi Farahani and Jalili Kamlo, SA. (2012). Estimated threshold level of inflation and its impact on economic growth (Case Study: Iran's economy during the period 1387-1344). Journal of Economic Development, Volume 2, Issue 7, Pages 133-156. Mandler, M. (2010). Macroeconomic dynamics and inflation regimes in the U.S. Results from threshold vector auto regressions. Joint Discussion Paper Series in Economics No. 12.

Mubarik, Y.A. (2005). Inflation and growth: An estimate of the threshold level of inflation in Pakistan, SBPRes, Bull. 1, PP: 35-44.

Peraei, St. and Dadvar, b. (2011). The effect of inflation on economic growth in the country with an emphasis on the uncertainty. Research Paper, No. 1, pages 80-67.

Peraei, St. and Dadvar, b. (2011). The effect of inflation on economic growth in the country with an emphasis on the uncertainty. Research Paper, No. 1, pages 80-67.

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Kremer, S. , Bick, A. & Nautz, D. (2011). Inflation and Growth: New Evidence from a Dynamic Panel Threshold Analysis. Working Paper, Free University Berlin, Department of Economics, Boltzmannstr.

Thranchyan, A., Jafari Samimi, A. and Balonejad Nori, b. (2013). Inflation tests stability in Iran (2011- 1972): Application of patterns ARFIMA. The study of economic growth in the third, No. 11. Vinayagathasan, T. (2013). Inflation and Economic Growth: A Dynamic Panel Threshold Analysis for Asian Economies, National Graduate Institute for Policy Studies, Tokyo, Japan. Zhang, C. & Clovis, J. (2009). Modeling US inflation dynamics: persistence and monetary policy regimes". Empir Econ 36:455–477.

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