Inflation and economic growth: A literature review

Abstract

This literature review explores the intricate relationship between inflation and economic growth, a critical issue in macroeconomics with profound implications for public policy. By exploring classical, neoclassical and Keynesian growth theories, the study demonstrates how inflation, depending on its level, can either boost demand and foster short-term investment or impede growth through market distortions and eroded purchasing power. Leveraging empirical analyses, including nonlinear regressions, dynamic panel models, and time series approaches, this review identifies critical inflation thresholds beyond which its impact turns adverse for growth. The study also emphasizes inflation uncertainty as a key factor that constrains long-term investment and heightens economic volatility. Ultimately, this synthesis offers insights for adaptable, context-aware monetary policies aimed at optimizing growth while preserving economic stability across diverse national contexts.