Inflation Rate and Economic Growth in Rwanda
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Abstract
The objective of macroeconomic policies is to achieve a high economic growth rate while maintaining a low inflation rate, it is also believed that a high inflation has an adverse effect on economic growth. But how low should the inflation rate be not to impact negatively on economic growth? The study assumed a nonlinear relationship between inflation and economic growth and attempts to identify the existence of threshold effects between these variables in the case of Rwanda using time series the period 2003-2019. Data was analyzed by means of a quadratic regression model and ordinary least square technique. The results showed that at low levels, inflation does not hurt economic growth, while at higher levels, inflation reduces economic growth. The estimated inflation threshold level is 14.97%. Since the findings of this study have unveiled the estimated threshold inflation rate consistent with economic growth in Rwanda, they would provide some useful guidance to economic decision makers in designing a more appropriate macroeconomic policy framework.