Inflation and Economic Growth in Developing Countries: New Evidence

The purpose of the present paper is to investigate the cross-sectional impacts of macroeconomic factors on economic growth and testing the hypothesis that inflation has negative effect on economic growth in 90 developing countries during 1995-2003. Methodology: We use a simultaneous equations system in which both inflation and economic growth are treated as endogenous variables. We have also extended the Levine – Renelt framework to include the so-called Gordon triangle model. Findings: Our findings indicate that the rate of exports of goods and services, the ratio of total private and public investment to GDP have positive and significance and the rate of labor force has positive but insignificance whereas, the ratio of current government expenditures to GDP as well as the inflation rate have negative and significance effect on economic growth in countries under consideration. Recommendations: Lowering the inflation rate is an effective step to reach high economic growth in these countries. Also, our results regarding Gordon's inflation adaptive equation show that the liquidity growth rate as well as the so – called Gordon inflation inertia plays a more significance role compared to other explanatory variables. Therefore, lowering rate of liquidity as well as policies promote optimistic expectation regarding the ability of government to control inflation via the inertia channel is suggested for these developing countries.