Academic journal article Journal of Emerging Trends in Economics and Management Sciences

The Effect of Inflation on Economic Growth in Qatar an Empirical Investigation: 1980-2011

Academic journal article Journal of Emerging Trends in Economics and Management Sciences

The Effect of Inflation on Economic Growth in Qatar an Empirical Investigation: 1980-2011

Article excerpt

Abstract

This paper explores the relationship between inflation and economic growth for sustainable economic development in Qatar. Using annual data on Economic growth and inflation rate for the period of 1980 to 2011, co-integration and error correction models are estimated. The empirical evidence demonstrates that there exists a statistically significant long-run negative relationship between inflation and economic growth in Qatar. This result has important implications for both domestic policy makers and the development partners working for the country. Specifically, our conclusion is of direct relevance to the conduct of the monetary policy by the Qatar Bank.

Keywords: inflation, economic growth, co-integration, error correction model, Qatar

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Qatar is a small, open, well monetized economy with no interest rate ceilings on deposits, and where market forces determine the interest rates. It does not have a demographic trap, poverty trap, or a savings trap like some of the other developing countries. Since the mid 1990s, the continuous efforts by policy makers to diversify revenues, control public expenditures, and privatization have led to the improvement of productivity and enhanced long-term economic growth. Qatar's real Gross Domestic Product (GDP) has been growing at high rates of almost 6% during the last 10 years. The inflation rate is relatively low even when compared to the average rate of inflation for the industrialized countries. In recent years, some developments have taken place which have led to more effective fiscal policy, created a more favorable business and economic environment, and enhanced the role of the private sector. Despite the increase in oil prices and revenues, economic reforms have continued to be top priority for the decision makers. Meanwhile, other measures have taken place to build up a comprehensive legal and economic system which is attractive to foreign investment and consistent with a free market and outward-oriented Qatar economy. In 1990s, the government of Qatar started to amend the legislative and bureaucratic framework to ensure easy and adequate inflow of foreign capital. Law No. 25 of 1990 allowed non-Qatari capital to participate in a wide range of economic activities that were Qatari exclusive. In 2000, the Qatari government amended the laws that govern the legal and economic environment, thus allowing foreign investors to exercise 100% ownership in any project. The exception to this is banking, insurance, and general trading where 51% Qatari partnership is still required. Also, the government introduced intellectual property right laws and reduced tariffs to comply with the World Trade Organization (WTO) standards.

In the mid of the last century, the literature about inflation showed that the economists spent much time to understand the reasons that causes inflation. The economists succeed to give details about the sources of inflation. But, until now the relation of inflation with the other macroeconomic variables such as the economic growth still debatable and there is still a disagreement about a lot of issues. Mankiw (2000) addressed the relation of inflation with the other macroeconomic variables as one of the most important unresolved questions of the macroeconomics. Specifically, Mankiw (2000) mentioned that both the cost of inflation and the cost of reducing inflation are topics on which the economists often disagree.

The nexus between inflation and economic growth have drawn extensive attention of macroeconomists, policy makers and the central bankers of both developed and developing countries. Specifically, the issue that whether inflation is necessary for economic growth or it is harmful generates a significant debate both theoretically and empirically. The issue originally evolves from the controversial notion between the structuralists and the monetarists1. In this connection, more recent work by Paul, Kearney and Chowdhury (1997) involving 70 countries (of which 48 are developing economies) for the period 1960-1989 found no causal relationship between inflation and economic growth in 40 per cent of the countries. …

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