Measuring the relationship between inflation and economic growth: evidence from selected European countries

Abstract

[Abstract]: The relationship between inflation and economic growth is crucial in any economy; for this reason, it has received wide attention in theoretical and empirical works. The coexistence of high economic growth together with low inflation becomes an essential objective for policymakers. It is particularly interesting to study this relationship in economies converging to the most developed ones, as is the case of Central and Eastern European countries with respect to core economies in the European Union. This paper examines the relationship between inflation and economic growth for six European countries in 1991-2015. This work has a twofold objective. Firstly, to unveil the existence of the relationship in these countries; secondly, to detect a potential different behaviour regarding the impact of inflation on economic growth in these two groups of countries, as they have their idiosyncrasy. The results point to a long-run positive relationship in all countries; regarding the short-run dynamics of economic growth, it is proven to be nonlinear. Following the results, the similarities between the two sets of countries are found out and the policy implications are presented.