Empirical Examination of Inflation's Influence on Economic Growth: Trends, Mechanisms, and Predictive Insights

Abstract

The primary objective of this article is to conduct a comprehensive empirical analysis to investigate the influence of inflationary processes on economic development. The authors of this article employ a statistical approach to furnish a comprehensive empirical analysis of the impact of inflationary processes on economic development. This study examines the Consumer Price Index (CPI) in EU-27 countries from 1999 to 2022, culminating in the construction of a linear model to elucidate the association between the CPI and GDP growth rates within these EU-27 nations. Furthermore, this paper delves into the macroeconomic implications of inflation for the EU-27. In addition to the aforementioned analysis, the authors also develop linear models to probe the relationship between inflation and Gross Domestic Investment (GDI), and GDP growth within Ukraine, covering the period from 1998 to 2022. Finally, the authors conclude this study by elucidating the transmission mechanism that elucidates how inflationary processes impact the economic development of Ukraine. In the context of the European Union, our analysis has revealed a positive correlation between inflation and GDP growth rates during the period spanning from 1999 to 2022. However, it is important to note that inflationary processes were not observed to exert a statistically significant influence on key macroeconomic variables such as gross domestic investment, interest rates, domestic lending to the private sector, and GDP growth rates within the EU during this time frame. Conversely, our investigation into Ukraine's economic dynamics from 1998 to 2022 has unearthed a negative linear relationship between changes in the CPI and GDP growth rates. Within the Ukrainian context, several factors, including the prevailing armed conflict, escalating interest rates, and challenges in domestic lending, have contributed to a discernible decline in domestic investment. Consequently, these factors have collectively exerted a detrimental impact on the country's GDP growth trajectory. It is worth emphasizing that this outcome highlights the importance of various macroeconomic variables that, at times, have adversely affected Ukraine's GDP growth, despite the National Bank of Ukraine's (NBU) inflation-targeting policy. The practical significance of this study resides in its comparative and comprehensive analysis of the repercussions of inflation on the economies of both the EU member states and Ukraine, particularly within the unique context of war.