Abstract
Using official provincial data for gross provincial product, consumer price index and other
explanatory variables from 1986 to 2006, the present paper investigates the nonlinear
effects of inflation on economic growth in China. The main finding of the study is that the
inflation threshold effect is highly significant and robust in China. Above the 2.50 percent
threshold, every 1-percentage point increase in the inflation rate impedes economic growth
by 0.61 percent; below this threshold, every 1-percentage point increase in the inflation rate
stimulates growth by 0.53 percent. This indicates that high inflation harms economic growth,
whereas moderate inflation benefits growth. We suggest that China should maintain a
moderate inflation rate for long-run growth.