Inflation and Economic Growth in Middle East Countries; A Threshold Panel Approach

Economists and policymakers worldwide consider economic growth and inflation as crucial macroeconomic variables. The correlation between these two variables has been a captivating topic in recent decades, but the literature lacks clarity on this relationship. Therefore, this study aims to investigate the connection between inflation and economic growth in Middle Eastern countries during the 2000-2021 period using a threshold panel model. The empirical findings suggest that there is a nonlinear relationship between inflation and economic growth in these countries. Specifically, when inflation is below 10.1 percent, it has not a significant impact on economic growth. However, beyond this threshold level of inflation, it has a significant negative impact on economic growth. High inflation as a way of increasing inflation expectations may increase the cost of production and decrease production and economic growth. Furthermore, high inflation leads to high volatility in inflation expectations which increases uncertainty in investment and production. This volatility damages people’s confidence in government policies which may decrease the effectiveness of monetary and fiscal policies in the economy. Moreover, high inflation decreases the competitive power of domestic producers against foreign producers which decreases exports and ultimately leads to decreased economic growth.