Though inflation, in general, is assumed to be detrimental to economic growth, it is not always so. Theoretical arguments as well as empirical evidences show that inflation has non-linear impact on economic growth. Below a certain rate of inflation, inflation encourages economic activities whereas beyond that point, it is detrimental to economic activities. Such a cut off rate of inflation is called optimal rate of inflation or threshold rate of inflation.
Optimal rate of inflation depends on the state of development of an economy. For underdeveloped as well as developing countries, the optimal rate of inflation is higher than that of the developed countries. Studies show that such rate of inflation for Nepalese economy is between 6 to 6.5 percent. Thus, increase in price level up to 6 percent per annum promotes investment activities and help boost the economy.
Below is the summary of some of the studies done for underdeveloped as well as developing economies.
Below is the summary of some of the studies done for underdeveloped as well as developing economies.
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| Source : https://nrb.org.np/ecorev/articles/vol29_1.pdf |
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