Does Inflation Affect the Relationship between Broad Money and Economic Growth? A Threshold Model
Does Inflation Affect the Relationship between Broad Money and Economic Growth? A Threshold Model

Summary/Abstract: This study empirically examines the relationship between broad money (M3) and economic growth according to different level of inflation. The impact is examined on the sample of 17 countries via threshold model for panel data. To ensure the robustness of the results, we apply several alternatives, including single and double threshold model. We conclude that an increase in money supply can be beneficial from the point of view of economic growth only for countries susceptible to maintain their inflation within an optimum interval, which is quantified by our model at around 2% level of inflation in the long run. The model estimation further revealed that countries with inflation over 3.3% should avoid an increase in money supply as they risk negative effects on their output.

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