The impact of inflation on economic growth evidence from a panel of selected asia countries
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UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM
INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS
VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS
THE IMPACT OF INFLATION ON ECONOMIC
GROWTH: EVIDENCE FROM A PANEL OF
SELECTED ASIA COUNTRIES
A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS
By
VU DOAN THANH TIEN
Academic Supervisor:
Dr. LE CONG TRU
HO CHI MINH CITY, AUGUST 2012
i
DECLARATION
“I certify that the substance of this thesis has not already been submitted for any degree and
have not been currently submitted for any other degree.
I certify that to the best of my knowledge and help received in preparing this thesis and all
sources used have been acknowledged in this thesis.”
ii
ACKNOWLEDGEMENTS
The first person I would like to send special thanks to is my supervisor - Dr. Le Cong Tru. I’m
grateful not solely his help throughout the thesis process, but also enthusiasm and many
lessons in an attempt to improve my knowledge and skills as well. He is usually ready to
assist me anytime, although he is bustling. The professor often keeps track of my work and
motivates me to finish the duty. To gain the result today, I cannot miss out his contributions.
Thanks so much, Dr.Tru!
Next, I’m happy to thank to Dr. Hoai, Dr. Ngai, and Dr. Nam. They tried their best to help me
select an appropriate topic for my thesis. When I confront to issues, they supported to find the
solution and give advice in hope that I might overcome the problems. Besides, I also thank to
the other professors of VNP for lectures and precious materials.
At the same time, I also send thanks to VNP officials, especially Ms. Hong. They are very
nice in helping me when having troubles. They inform exactly and quickly to students. I enjoy
their enthusiasm. Additionally, I also send thanks to Mr. Quy - a librarian. He is nice to his
duty. I’m always welcomed by him.
Last but not least, I cannot forget sending thanks to my family and friends. I’m very grateful
them to take care of and encourage me while performing the thesis. Not only do they support
for finance, but also for mental. I always keep in mind devotion and sacrifice of all.
Thanks so much for everything!!!
iii
TABLE OF CONTENTS
TABLE OF CONTENTS ............................................................................................. IV
LIST OF FIGURES .................................................................................................... VII
LIST OF TABLES ..................................................................................................... VIII
ABSTRACT .................................................................................................................... 2
CHAPTER 1 .................................................................................................................... 3
INTRODUCTION .......................................................................................................... 3
1.1 PROBLEM STATEMENT..................................................................................... 3
1.2 RESEARCH OBJECTIVES AND RESEARCH QUESTIONS ........................... 5
1.3 STRUCTURE OF THE PAPER ............................................................................ 6
CHAPTER 2.................................................................................................................... 8
LITERATURE REVIEW .............................................................................................. 8
2.1 THEORIES RELATED TO INFLATION AND GROWTH ................................. 8
2.1.1
Classical Theory ......................................................................................... 9
2.1.2
Neo-Classical Theory .................................................................................9
2.1.3
Endogenous Theory .................................................................................10
2.1.4
Keynesian Theory .................................................................................... 10
2.1.5
Neo-Keynesian Theory ............................................................................ 11
2.1.6
Monetarist Theory .................................................................................... 11
2.2 GROWTH MODELS .......................................................................................... 12
2.2.1
The Basic Growth Model .........................................................................13
2.2.2
Solow Model ............................................................................................ 13
2.2.3
Augmented Solow Model ........................................................................14
2.3 VARIABLE DEFINITION .................................................................................. 15
2.3.1
Growth Rate ............................................................................................. 15
2.3.2
Inflation ....................................................................................................16
2.3.3
Cost of Inflation ....................................................................................... 17
2.3.4
Control Variables...................................................................................... 18
2.3.5
Threshold Concept ...................................................................................21
iv
2.4 EMPIRICAL STUDIES ....................................................................................... 21
2.4.1
The Studies of 1960s-1980s .....................................................................22
2.4.2
The Studies of 1990s ................................................................................23
2.4.3
Recent Studies .......................................................................................... 26
CHAPTER 3.................................................................................................................. 31
ECONOMIC OUTLOOKS OF STUDIED COUNTRIES ....................................... 31
3.1 Economic Outlook of Vietnam ............................................................................ 32
3.2 Economic Outlook of Philippines ........................................................................ 34
3.3 Economic Outlook of Malaysia ........................................................................... 36
3.4 Economic Outlook of Indonesia .......................................................................... 39
3.5 Economic Outlook of Thailand ............................................................................ 42
3.6 Economic Outlook of China ................................................................................ 44
3.7 Economic Outlook of India.................................................................................. 46
CHAPTER 4.................................................................................................................. 49
MODEL SPECIFICATION & RESEARCH METHODOLOGY ........................... 49
4.1 EMPIRICAL MODEL ......................................................................................... 49
4.2 MODEL SPECIFICATION ................................................................................. 50
4.2.1
Non-Linear Inflation-Growth Relationship .............................................50
4.2.2
Testing Thresholds in the Inflation-Growth Relationship........................ 51
4.3 DATA ................................................................................................................... 52
4.4 . RESEARCH METHODS .................................................................................. 53
CHAPTER 5.................................................................................................................. 57
EMPIRICAL RESULTS .............................................................................................. 57
5.1 DESCRIPTIVE ANALYSIS ................................................................................ 57
5.1.1
China ........................................................................................................57
5.1.2
India .........................................................................................................60
5.1.3
Indonesia ..................................................................................................62
5.1.4
Malaysia ...................................................................................................64
5.1.5
Philippines................................................................................................ 66
5.1.6
Thailand ...................................................................................................68
5.1.7
Vietnam ....................................................................................................70
5.2 REGRESSION ANALYSIS ................................................................................. 72
5.2.1
China ........................................................................................................75
v
5.2.2
India .........................................................................................................75
5.2.3
Indonesia ..................................................................................................76
5.2.4
Malaysia ...................................................................................................76
5.2.5
Philippines................................................................................................ 77
5.2.6
Thailand ...................................................................................................78
5.2.7
Vietnam ....................................................................................................78
5.3 INFLATION THRESHOLD ANALYSIS ............................................................ 79
5.3.1
Threshold Results of China ......................................................................79
5.3.2
Threshold results of India ........................................................................80
5.3.3
Threshold results of Indonesia .................................................................81
5.3.4
Threshold Results of Malaysia .................................................................82
5.3.5
Threshold Results of Philippines ............................................................. 84
5.3.6
Threshold Results of Thailand .................................................................85
5.3.7
Threshold Results of Vietnam ..................................................................86
CHAPTER 6.................................................................................................................. 89
CONCLUSIONS, POLICY RECOMMENDATION, LIMITATIONS AND FUTHER
STUDY........................................................................................................................... 89
6.1 CONCLUSIONS ................................................................................................. 89
6.2 POLICY RECOMMENDATIONS ...................................................................... 90
6.3 LIMITATIONS .................................................................................................... 92
6.4 FURTHER STUDY ............................................................................................. 92
REFERENCES ............................................................................................................. 93
APPENDIX A ................................................................................................................ 99
APPENDIX B .............................................................................................................. 101
APPENDIX C.............................................................................................................. 107
APPENDIX D............................................................................................................... 113
vi
LIST OF FIGURES
Figure 2-1: Analysis framework for the impact of inflation on growth and thresholds remained
in the relationship .... teroscedastiscity with White test method of
Vietnam
112
APPENDIX D
The scatter diagrams present the relationship between variables in the
model of the countries
.584
10
16.5
.580
8
16.0
15.5
.572
.568
GOV_CH
6
EX_CH
EMPL_CH
.576
4
2
.564
.556
13.5
-2
2
4
6
8
10
12
14
16
14.5
14.0
0
.560
15.0
13.0
2
4
6
8
Y_CH
10
12
14
16
2
4
6
Y_CH
25
20
8
10
12
14
16
12
14
16
Y_CH
44
80
42
70
40
60
10
SCH_CH
INV_CH
INF_CH
15
38
50
5
36
0
-5
40
34
2
4
6
8
10
12
14
16
30
2
4
6
8
Y_CH
10
Y_CH
12
14
16
2
4
6
8
10
Y_CH
10
TFP_CH
5
0
-5
-10
2
4
6
8
10
12
14
16
Y_CH
Figure D-1: The scatter diagrams describe the correlation between the
variables in the model of China
113
40
6
60
36
4
56
32
2
0
INV_ID
64
SCH_ID
TFP_ID
8
52
48
-2
24
44
2
3
4
5
6
7
8
9
10 11
20
2
3
4
5
6
Y_ID
7
8
9
10 11
2
3
4
5
Y_ID
14
12
10
6
7
8
9
10 11
8
9
10 11
Y_ID
13.6
1
13.2
0
12.8
-1
8
6
EX_ID
12.4
GOV_ID
INF_ID
28
12.0
-4
-5
10.8
2
10.4
2
3
4
5
6
7
8
9
10 11
-3
11.6
11.2
4
-2
-6
2
3
4
5
6
Y_ID
7
Y_ID
8
9
10 11
2
3
4
5
6
7
Y_ID
.43
.42
EMPL_ID
.41
.40
.39
.38
.37
.36
2
3
4
5
6
7
8
9
10 11
Y_ID
Figure D-2: The scatter diagrams describe the correlation between the
variables in the model of India
114
8
80
40
76
4
36
72
-4
-8
32
INV_IN
68
SCH_IN
TFP_IN
0
64
60
56
-12
28
24
52
20
-16
-20
-16
48
-12
-8
-4
0
4
8
44
-16
12
-12
-8
-4
Y_IN
0
4
8
16
-16
12
50
40
-4
0
4
8
12
4
8
12
Y_IN
9.0
12
8.5
10
8.0
8
30
20
EX_IN
7.5
GOV_IN
INF_IN
-8
Y_IN
60
7.0
-8
-4
0
4
8
12
4
2
0
5.5
-12
6
6.5
6.0
10
0
-16
-12
5.0
-16
-12
-8
-4
Y_IN
0
Y_IN
4
8
12
-2
-16
-12
-8
-4
0
Y_IN
.45
EMPL_IN
.44
.43
.42
.41
-16
-12
-8
-4
0
4
8
12
Y_IN
Figure D-3: The scatter diagrams describe the correlation between the
variables in the model of Indonesia
115
8
75
45
4
40
70
-8
INV_MA
35
SCH_MA
TFP_MA
0
-4
65
25
-12
60
20
-16
-20
55
-8
-4
0
4
8
12
15
-8
-4
0
Y_MA
4
8
12
-8
-4
0
Y_MA
6
4
8
12
4
8
12
Y_MA
14
5
25
20
13
4
15
3
12
EX_MA
GOV_MA
INF_MA
30
11
2
10
5
10
1
0
0
9
-8
-4
0
4
8
12
-5
-8
-4
0
Y_MA
4
Y_MA
8
12
-8
-4
0
Y_MA
.400
.395
EMPL_MA
.390
.385
.380
.375
.370
.365
-8
-4
0
4
8
12
Y_MA
Figure D-4: The scatter diagrams describe the correlation between the
variables in the model of Malaysia
116
6
84
26
4
82
24
80
0
-2
22
78
INV_PH
SCH_PH
TFP_PH
2
76
18
74
-4
16
72
-6
70
-1
0
1
2
3
4
5
6
7
8
20
14
-1
0
1
2
Y_PH
3
4
5
6
7
8
-1
0
1
2
Y_PH
20
14
16
13
12
12
3
4
5
6
7
8
5
6
7
8
Y_PH
4
8
0
-2
EX_PH
GOV_PH
INF_PH
2
11
4
10
0
9
-4
-6
-8
-10
-1
0
1
2
3
4
5
6
7
8
-12
-1
0
1
2
Y_PH
3
4
Y_PH
5
6
7
8
-1
0
1
2
3
4
Y_PH
.395
.390
EMPL_PH
.385
.380
.375
.370
.365
.360
-1
0
1
2
3
4
5
6
7
8
Y_PH
Figure D-5: The scatter diagrams describe the correlation between the
variables in the model of Philippines
117
5
80
44
70
40
60
36
-5
INV_TH
SCH_TH
TFP_TH
0
50
32
40
28
30
24
-10
-15
-12
-8
-4
0
4
8
20
-12
12
-8
-4
Y_TH
4
8
5
12.5
20
12.0
15
EX_TH
GOV_TH
10.5
0
4
8
12
9.0
-12
0
4
8
12
4
8
12
5
0
-5
9.5
-4
-4
10
11.0
10.0
-5
-8
-8
Y_TH
11.5
0
-10
-12
20
-12
12
Y_TH
10
INF_TH
0
-8
-4
Y_TH
0
Y_TH
4
8
12
-10
-12
-8
-4
0
Y_TH
.55
.54
EMPL_TH
.53
.52
.51
.50
.49
.48
-12
-8
-4
0
4
8
12
Y_TH
Figure D-6: The scatter diagrams describe the correlation between the
variables in the model of Thailand
118
5
30
44
4
40
20
3
36
10
1
0
-1
32
INV_VN
SCH_VN
TFP_VN
2
0
-10
24
20
-2
-20
16
-3
-4
-30
3
4
5
6
7
8
12
3
4
5
Y_VN
6
7
8
3
4
5
Y_VN
80
6
7
8
6
7
8
Y_VN
8.5
70
-2
-4
8.0
60
-6
7.5
40
30
-8
EX_VN
GOV_VN
50
INF_VN
28
7.0
-10
-12
6.5
20
-14
6.0
10
0
-16
5.5
3
4
5
6
7
8
-18
3
4
5
Y_VN
6
Y_VN
7
8
3
4
5
Y_VN
.58
.56
EMPL_VN
.54
.52
.50
.48
.46
.44
3
4
5
6
7
8
Y_VN
Figure D-7: The scatter diagrams describe the correlation between the
variables in the model of Vietnam
119
