Estimating Threshold Effect of Inflation on Economic Growth: Evidence from Iraq

Abstract

The forthcoming is an empirical study that tries to determine and estimate the threshold level of inflation in economic growth in the Iraqi economy covering the period of (2004 – 2022). In this study, we applied threshold estimation techniques in addition to causality analysis to test the direction of the relationship. The econometric empirical model consists of (gross domestic product) as a regressing variable, while the regressor variable includes (inflation rate) Moreover the control variables were (Domestic investment, money supply, investment and term of trade). The outcome of the study indicates that all the variables were non-stationary at levels rather they become stationary at first difference. Furthermore, the causality test of Granger causality analysis indicates that there is a bi-directional causality run from the inflation rate towards economic growth and vice versa. However, the regressor and controlled variable carry out the significant impacts on economic growth in case the threshold inflation level is less than 8%. Finally, the ideal level of the threshold inflation was estimated (8%), as promoting economic growth. Rather the negative effects on economic growth when the threshold level exceeds the ideal level of (8%).