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 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 CHAPTER INTRODUCTION 1.1 PROBLEM STATEMENT 1.2 RESEARCH OBJECTIVES AND RESEARCH QUESTIONS 1.3 STRUCTURE OF THE PAPER CHAPTER LITERATURE REVIEW 2.1 THEORIES RELATED TO INFLATION AND GROWTH 2.1.1 Classical Theory 2.1.2 Neo-Classical Theory 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 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 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 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 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 16.0 15.5 572 568 GOV_CH EX_CH EMPL_CH 576 564 556 13.5 -2 10 12 14 16 14.5 14.0 560 15.0 13.0 Y_CH 10 12 14 16 Y_CH 25 20 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 36 -5 40 34 10 12 14 16 30 Y_CH 10 Y_CH 12 14 16 10 Y_CH 10 TFP_CH -5 -10 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 60 36 56 32 INV_ID 64 SCH_ID TFP_ID 52 48 -2 24 44 10 11 20 Y_ID 10 11 Y_ID 14 12 10 10 11 10 11 Y_ID 13.6 13.2 12.8 -1 EX_ID 12.4 GOV_ID INF_ID 28 12.0 -4 -5 10.8 10.4 10 11 -3 11.6 11.2 -2 -6 Y_ID Y_ID 10 11 Y_ID 43 42 EMPL_ID 41 40 39 38 37 36 10 11 Y_ID Figure D-2: The scatter diagrams describe the correlation between the variables in the model of India 114 80 40 76 36 72 -4 -8 32 INV_IN 68 SCH_IN TFP_IN 64 60 56 -12 28 24 52 20 -16 -20 -16 48 -12 -8 -4 44 -16 12 -12 -8 -4 Y_IN 16 -16 12 50 40 -4 12 12 Y_IN 9.0 12 8.5 10 8.0 30 20 EX_IN 7.5 GOV_IN INF_IN -8 Y_IN 60 7.0 -8 -4 12 5.5 -12 6.5 6.0 10 -16 -12 5.0 -16 -12 -8 -4 Y_IN Y_IN 12 -2 -16 -12 -8 -4 Y_IN 45 EMPL_IN 44 43 42 41 -16 -12 -8 -4 12 Y_IN Figure D-3: The scatter diagrams describe the correlation between the variables in the model of Indonesia 115 ... 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. .. 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...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