INFLATION THRESHOLDS AND ECONOMIC GROWTH IN RWANDA

Abstract

Inflation remains a critical macroeconomic variable influencing economic performance, with central banks often targeting low and stable inflation to support sustainable growth. While moderate inflation is generally associated with positive economic outcomes, excessive inflation can distort price signals, reduce purchasing power, and hinder long-term development. This study examines the concept of inflation thresholds, which suggests that the relationship between inflation and economic growth is non-linear, changing from positive to negative beyond a certain optimal level. At low inflation rates, economic growth tends to improve; however, once inflation surpasses a critical point, its impact becomes detrimental to economic performance. This turning point, referred to as the threshold level, represents the inflation rate at which the effect on growth shifts direction. Existing literature indicates that this optimal inflation level varies across countries and is influenced by structural and institutional factors, particularly in developing and developed economies. Many empirical studies have attempted to estimate this threshold using different datasets, econometric models, and methodological approaches, both for individual countries and comparative analyses. Despite extensive research, there remains ongoing debate regarding the precise inflation level that best supports economic growth. This study contributes to the literature by reinforcing the notion that inflation does not affect growth uniformly but instead operates through a regime-switching mechanism defined by a threshold effect. Understanding this relationship is essential for policymakers in designing effective monetary policies that balance inflation control with economic expansion objectives.