On the nonlinear relationship between inflation and economic growth

• The study analyzes the impact of inflation on long run output growth.
• The time varying estimates show a negative and nonlinear inflation–growth relationship.
• This relationship is conditioned by some country-specific developments.
• Open and financially developed economies have high cost of inflation.
• Heavy public size aggravates inflation effects on growth for developing countries.

Using a large panel data set from both developed and developing economies and employing the PSTR and dynamic GMM techniques, this study highlights two aspects of the inflation–growth relationship. First, it analyzes the nonlinearity of the relationship and identifies several thresholds for the global sample and for various income-specific sub-samples. Second, it identifies some country-based macroeconomic features that influence this nonlinearity. Our empirical results substantiate both views and validate the fact that inflation–growth nonlinearity is sensitive to a country׳s level of financial development, capital accumulation, trade openness and government expenditures. Moreover, these country-specific characteristics result in some marked differences in this nonlinear relationship.