Revisiting the Inflation–Growth Nexus: Evidence from Malaysia Using OLS Estimation

Abstract

This research investigates the influence of inflation on economic growth, with particular focus on developing economies. Previous studies reveal that the relationship between inflation and growth is not uniform but instead varies depending on the country context and time period under review. Evidence from developing European nations shows that inflation exerts a slight negative impact on growth, whereas research conducted in Pakistan highlights a significant adverse effect of inflation on economic growth in both the short and long run. Conversely, another study covering the period 1980–2018 in Pakistan reported no meaningful effect of inflation or unemployment on economic performance. Given these mixed and sometimes contradictory findings, this study adopts a time series approach to explore the dynamics between inflation and economic growth, with Gross Domestic Product (GDP) employed as the dependent variable. The analysis relies on the Ordinary Least Squares (OLS) estimation technique, implemented through EViews software. To capture the relationship in greater detail, a semi-log linear regression model was utilized, incorporating inflation, interest rate, government consumption, and trade openness as explanatory variables. Additionally, robustness checks and the Ramsey RESET test were conducted to validate the stability and proper specification of the model. The empirical outcomes suggest that inflation exerts a substantial positive effect on economic growth, reinforcing the ongoing debate on macroeconomic stability and balanced policy intervention. Overall, the study underscores the importance of effective inflation management as a prerequisite for sustaining long-term economic growth in developing nations.