Abstract

The study analyses the relationship among inflation, economic growth and investment. This was done by examining whether there are two thresholds in the non-linear relationships between inflation and growth. In Malawi, the test for the second threshold would add value to the study done by Nkume and Ngalawa (2014) who tested for only one threshold. The study also goes beyond the Nkume-Ngalawa study and it attempts to explain possible transmission channels of inflation to growth, of which the investment channel was chosen. The study goes further to investigate a two-tier threshold between inflation and investment. This study follows the methodology developed by Khan and Senhadji (2001) to examine the existence of threshold effects in the inflation-growth relationship. This methodology was later extended by Iqbal and Nawaz (2010) to examine the possibility of the existence of a second threshold in the inflation-growth relationship. Before testing for the second threshold, the first threshold was also retested so as to aid in the determination of the second threshold. Using Malawian data for the period 1980 to 2014 and following the work of Iqbal and Nawaz (2010), the results suggest the existence of inflation threshold level of 11 percent, and they do not support the existence of a second threshold in the inflation-growth relationship. In the inflation-investment relationship, the results do not support investment as the transmission channel of inflation to growth in Malawi and also do not support the existence of threshold effects in inflation-investment relationship. This finding suggests that bringing inflation down to single digits should be the goal of macroeconomic management in Malawi.

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School	: School of Law, Economics and Government
Issued Date	: 2016

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