Inflation and Economic Growth in Kuwait: 1985-2005. Evidence from Co-Integration and Error Correction Model

It is widely believed that moderate and stable inflation rates promote the development process of a country, and hence economic growth. Moderate inflation supplements return to savers, enhances investment, and therefore, accelerates economic growth of the country. The main purpose of this study is to study and analyze the relationship between inflation and economic growth in the context of Kuwait. Using annual data set on real GDP and CPI for the period of 1985 to 2005, an assessment of empirical evidence has been acquired through the co-integration and error correction models. The empirical evidence demonstrates that there exists a statistically significant longrun negative relationship between inflation and economic growth for the country as indicated by a statistically significant long-run negative relationship between CPI and real GDP. These results have important policy implications for both domestic policy makers and the development partners working for the country. Specifically, our conclusion is of direct relevance to the conduct of the monetary policy by the Kuwait Bank.