Essays on Inflation and Output-Growth Dynamics in Developing Economies

This dissertation empirically investigates the dynamics of the nexus between inflation and output-growth in developing economies, with a particular focus on the economy of Pakistan. The first essay examines the ‘inflation-growth nexus by considering sectoral growth data of 113 developing economies. Research at the aggregate level yields mostly ambiguous results. Here, we perform a disaggregated analysis of inflation and output growth. For each sector agriculture, industry and services inflation and value-added sectoral growth, for the period 1981-2015, are considered, and sectoral inflationary spillovers are captured. Empirical analysis reveals that three major sectors of the economy react differently to various impulses of inflation, and the significance of sectoral-inflation is evidenced. Inflation is found to be detrimental to the growth of industrial sector only, and, when sectoral-inflation is accounted for, no significant impact of inflation is found in services and agricultural sectors. The policy relevance for developing economies is that the central banks of these economies must carefully consider the differing consequences of their actions on individual sectors while taking into consideration the value-added share of each sector in the respective economy. The second essay sheds light on the nexus by augmenting the basic model with an interaction term of inflation and the value-added share of agricultural sector in total output. By placing emphasis on sectoral heterogeneity and cross-sectional dependence over the period 1974-2013, the empirical findings are consistent with a negative relationship. An annual increase of 10 percent in average inflation rate tends to reduce GDP growth by 0.120.20 percentage points. However, once the sectoral heterogeneity existing in sectors is taken into account, there exists a threshold level of 50 percent value-added contribution of the agriculture sector to the GDP growth, beyond which the relationship becomes positive. The third essay develops a global vector autoregressive (GVAR) model for Pakistan and 32 trading partners, to illustrate the dynamics of inflation and output. After taking into account the impact of increasing interdependencies, trade spillovers and changing global conditions, the general impulse response function (GIRF) analysis revealed that the impacts of shocks to foreign variables (such as US real GDP, oil and food prices) are transmitted rapidly, and put forward a significant impact on key variables. However, the responses differ across economies. The findings indicate that, since Pakistan is increasingly integrated with key global players, worldwide developments play a crucial role in explaining major domestic variables. Inflation in Pakistan is driven more strongly by the global changes in oil and food prices than GDP. For monetary policy formulation, the essay suggests that the central bank should take into account developments in inflation-output dynamics of Pakistans major trading partners.eingereicht von Muhammad AyyoubUniversität Linz, Dissertation, 2018OeBB(VLID)258194