Impact Of Inflation On Economic Growth Of Papua New Guinea

Abstract

: This study has been motivated by recent wave of high inflation and economic growth experienced in the country over the past fifty years in the economic history of PNG. According to structuralist theory, inflation is essential for economic growth and where there is high economic growth, it is an inevitable economic phenomena where there is always a high inflation.  They both go together hand in hand and they influence each other as they always move at the parallel phase.  However on the other hand, monetarist theory see inflation as a detrimental factor to economic growth. As such, depending on type inflation accelleration and natures of their causes, they bear different degrees of impacts on economic growth. The impacts are many layered either positive or negative. Thus this study has been done to crtically assess the determinants that add value to economic growth and their impact on PNG economy. In order to assess the impacts and to find out the results accordingly, the study has utilized the regression model to analyze the data. The data used in this study are obtained from Central Bank, World Bank, UN data and National Statistical Office of PNG from 1977 to 2021. The results otained from regression model has shown that the partial effect of GDP is inelastic because increase in output is less than increase in input. This reveals that the impact of inflation on GDP growth from demand side is greater than supply side meaning, the sensitivity of inflation to change in economic growth is greater than other variables in the model. Therefore study concludes that inflation greatly influence GDP growth and has positive impact on economic growth of Papu New Guinea followed by employment and capital formation as shown by the results .

Keywords: Economic growth, inflation, capital formation, employment.