Threshold in the relationship between inflation and economic growth: Empirical evidence in Vietnam

Abstract

This paper aims to determine a threshold level in the relationship between inflation and economic growth in Vietnam. Our paper is considered as one of the first empirical studies on inflation threshold in Vietnam - a country in transition from a communist centrally-planned to a market economy. The research applied three regression methods including Ordinary Least Squares (OLS), Two-Stages Least Squares (2-SLS) and Generalized Method of Moments (GMM) with annual data for the period of 1986 - 2013. The results consistently concluded that the inflation threshold is about 7 percent, which means inflation will be detrimental to economic growth if inflation rate exceeds 7 percent. Therefore, the policy-makers in Vietnam need to define a target inflation rate lower than this level to stabilize economic growth. The results also indicated that the Government should increase investment as well as enhance the effectiveness of investment to foster economic growth. Finally, Vietnam should stabilize trade balance to favor economic growth in long term.