Abstract

This paper examines the long-run inflation-growth relationship in developing economies by placing emphasis on sectoral heterogeneity and cross-sectional dependence. This relation is explored using a large panel dataset of 113 developing economies over the period 1974-2013. The empirical findings are consistent with a linear negative relationship. An annual increase of 10 percent in average inflation rate tends to reduce the GDP growth by 0.12-0.20 percentage points. Inflation is however found to positively affect economic growth if the value-added share of agricultural sector in the total output exceeds the threshold level of 50 percent. The opposite applies if the value added share falls below this threshold level.

KEYWORDS

Cross-sectional dependence; developing economies; economic
growth; inflation; heterogeneity.

JEL CLASSIFICATION

E31; E58; O41

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