Inflation, Inflation Uncertainty and the Economic Growth Nexus: A Review of the Literature

Abstract

Abstract Research background: Price stability plays a crucial role in ensuring stabilities in the financial markets as well as the real sector. Despite this, questions are still raised, querying if it is either inflation, inflation uncertainty or a combination of both, which affects economic growth? The results obtained, both theoretically and empirically, differ. This paper seeks to revisit and provide both the theoretical and empirical review of literature on the inflation, inflation uncertainty and economic growth nexus. Purpose: The focus of the paper is centred on the review of theoretical literature, investigating if the differences in findings are attributed to differences in the channels through which inflation and inflation uncertainty is passed over to economic growth; as well as a review of empirical literature, investigating if the source of differences in the findings lies in the separate or joint estimation of inflation and inflation uncertainty on economic growth. Research methodology: This paper presents an extensive review of scholarly studies on the inflation, inflation uncertainty and economic growth nexus based on their results. The paper analysed, synthesised and critically evaluated previous studies on the inflation, inflation uncertainty and economic growth nexus on both the theoretical and empirical fronts. Results: In theoretical literature, the study found that the impact of inflation and inflation uncertainty is passed over to economic growth mainly through two channels, which are the price-informative role and the investment spending channel. From the empirical front, studies which separately estimated the role of either inflation or inflation uncertainty on economic growth found mixed results. Studies which estimated the joint impact of both variables on economic growth, arrived at a conclusion that inflation harms economic growth while the literature still remains inconclusive on inflation uncertainty. Novelty: The study provides an insight into the inflation, inflation uncertainty and economic growth nexus based on a detailed review of literature on the subject based on various transmission channels. Further, it enriches the literature through exploring possible reasons behind the lack of consensus on the impact of inflation and inflation uncertainty on economic growth.