Inflation and Economic Growth in Developing Countries: A Systematic Literature Review of the Relationship and Its Transmission Mechanisms

Abstract

Inflation and economic growth are closely connected, yet their relationship in developing countries remains contested. Differences in economic structure, institutional quality, financial development, and exposure to external shocks may cause inflation to affect growth through distinct channels. This study aims to synthesize conceptual and empirical evidence on the inflation–growth relationship and the mechanisms through which inflation is transmitted to economic activity. It adopts a systematic literature review approach, organizing evidence by inflation regime, sectoral outcome, and transmission channel. The reviewed studies report a generally nonlinear relationship: inflation may have limited or context-dependent effects at lower levels, while higher inflation is associated with weaker growth. In Indonesia, one provincial study estimates an inflation threshold of 9.59%. A study covering 27 developed and developing economies reports turning points of 12.23% and 5.36% across two panels. Sectoral evidence from 113 developing economies indicates a negative effect on industrial growth, while effects on agriculture and services are not significant after sectoral inflation is considered. The literature identifies investment uncertainty, financial depth and credit, exchange-rate movements, and monetary-policy responses as key transmission mechanisms. These findings suggest that no single inflation threshold applies universally; estimates vary with country characteristics, sample composition, and research methods. The review concludes that inflation policy should account for structural and institutional differences while monitoring effects on investment, finance, exchange rates, and sectoral production. The findings are a qualitative synthesis, not pooled estimates.