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How inflation rate is impactful in the economy, since it affects purchasing power, interest rates,

consumer confidence, among other macroeconomic variables.

The content of this section is mostly relevant to the recent empirical results of finding effect of inflation
in the economy. Although there is a large number of literature which measures the relationship between
economic development and inflation rate, a paper that directly measures how inflation rate is impactful
in the economy could not be found. Moreover, there is no prior literature on the relationship between
inflation rate and macroeconomic variables in Germany which can be taken as example in our paper. In
the absence of detailed study focusing on the effect of inflation on the economy in case of Germany, this
section will review the literature of other countries that analyse the relationship between inflation and
economic development.

Before the two oil shocks in 1973 and 1979, many researchers believed that inflation has an insignificant
or positive relationship with economic growth. However the stagflation of 1970 challenged this view by
economic data. In general, most of the literature revealed that there is a significant connection between
inflation and development of economy and the relationship is negative. Economists have found that
inflation is harmful for economy [Barro, 1991; Kim and Willett, 2000; Apergis, 2005]. Empirical evidence
of many economists supported the point of view that low inflation enhances employment and economic
growth [Fischer, 1993; Sarel, 1996; Khan and Senhadji, 2001; Pollin and Zhu, 2006].

Mubarik [2005] analysed the dataset from 1973 to 2000 and calculated the threshold level of inflation for
Pakistan. His findings revealed that inflation rate beyond 9% is harmful for economic growth of Pakistan.
Similarly, Lee and Wong [2005] estimated 7.25% as threshold level of inflation rate for Taiwan based on
quarterly dataset of 1965-2002. Gurgul and Lach tried to explore the nexus between inflation rate and
economic growth in Polish provinces after EU accession during 2004-2010 based on the dataset of sixteen
Polish province. They found that the threshold levels of inflation rate were equal to 1.4% and 3.4% for one
year lagged and contemporaneous effects respectively.

Wang (1996) analysed the relationship between inflation and economic growth in China using data for
1978-1993. He concluded that inflation in year t had an insignificant contemporaneous effect on economic
growth but it had a significant impact on economy in year t+1.

Carvalho, Ribeiro and Marques (2018) analyses the relationship between inflation and economic
development using GLS estimator in a panel of 65 countries from 2001 to 2011. Their results indicates
that inflation is inversely correlated with the level of technological content of the economy which
measured by share of high-tech exports. Whereas human capital and cyclical unemployment are directly
related to the degree of inflation persistence and terms of trade growth. However their findings shows an
inverse and low correlation between inflation persistence and economic development.
Hypothesis of the Study:

In this study, we have chosen five variables to test whether they have effect on inflation rate measured
by consumer price index in Germany. For that reason, we have taken simple regression analysis to test
the relationship between consumer price index and individual variables as well as we have tested multiple
regression analysis for the variables that have effect on consumer price index.

H0: There is no significant relationship between consumer price index and independent variables
(unemployment rate, production price index, money market interest rates, oil price, stock market price)

H1: There is a significant relationship between consumer price index and independent variables

Objectives of the study

General Objective:

The main objective of this study is to examine the impact of selected macroeconomic variables on inflation
to the economic growth of Germany.

Specific Objective

The specific objectives of this study are:

1. To identify the long run relationship between unemployment rate and inflation.
2. To identify the long run relationship between production price index and inflation.
3. To identify the long run relationship between money market interest rates and inflation.
4. To identify the long run relationship between oil price and inflation.
5. To identify the long run relationship between stock market prices and inflation.

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