Optimal Inflation Rate for Kazakhstan

Sustainable economic growth and low inflation are key goals of any macroeconomic policy. The relationship between these two indicators remains a central question for economists and policymakers. In recent years, this issue has gained more attention, especially as discussions grow about expanding the mandate of Kazakhstan’s National Bank — not just to ensure price stability, but also to consider goals related to economic growth and employment.

Against this backdrop, it’s crucial to understand how inflation impacts economic growth in Kazakhstan. This brief analysis seeks to answer the following questions:

•  What is the relationship between inflation and economic growth in Kazakhstan?

•  If the impact is non-linear, what does the curve look like? Is there a point where inflation becomes “balanced” — neither slowing nor boosting growth?

Key Findings

The analysis confirms that the relationship between inflation and growth is non-linear. Using a threshold regression model, the study finds that the balanced inflation rate for Kazakhstan over the analyzed period is around 6% annually.

•  When inflation is below 6%, its effect on growth is statistically insignificant.

•  When inflation exceeds 9%, its impact turns negative: each additional percentage point of inflation beyond this threshold leads to a slowdown in GDP growth.

Why does this happen? High inflation tends to:

•  Undermine business investment due to reduced purchasing power;

•  Increase inflation expectations, feeding a vicious cycle;

•  Push businesses to rely more on external financing, which becomes more expensive in an inflationary environment;

•  Lead banks to raise interest rates, which limits access to credit and weakens the financial sector.

It’s worth noting that this study used real GDP growth as a proxy for economic development. However, in reality, the ultimate measure of progress is quality of life — which includes factors like living standards. That’s why it’s more accurate to speak not of an “optimal” inflation rate, but of a “tolerable” upper limit for inflation in terms of supporting growth. The truly optimal level from a social and economic standpoint may be lower and harder to define precisely.

Conclusion

•  For Kazakhstan, long-term growth depends on keeping inflation low and stable.

•  The inflation target should be below 6%, with lower volatility.

•  The National Bank’s current inflation-targeting policy is aligned with these goals, supporting investment and economic stability.

In short, managing inflation isn’t just about keeping prices in check — it’s about laying the foundation for stronger, more resilient growth.

Literature Review

A large number of studies around the world have explored the relationship between inflation and economic growth. However, their findings are mixed and can generally be grouped into four categories:

•  The first group of researchers concludes that inflation has no significant impact on economic growth (Cameron, Hum & Simpson, 1996; Dorrance, 1963; Sidrauski, 1967).

•  The second group finds a positive relationship between inflation and growth (Mallik & Chowdhury, 2001; Shi, 1999; Tobin, 1965).

•  The third group argues that inflation has a negative effecton growth (Andres & Hemando, 1997; De Gregorio, 1992; Stockman, 1981).

•  The fourth group suggests that the relationship is non-linear, meaning inflation can help or hurt growth depending on its level.

Many studies have also found the existence of a threshold level of inflation. Below this threshold, inflation either has a positive or statistically insignificant impact on growth. But once inflation exceeds that level, its impact turns negative (Barro, 1996; Fischer, 1993; Sarel, 1996; Bick, 2010; Khan & Senhadji, 2000).

Table 1 – Inflation Threshold Levels, %

As seen in these studies, the inflation threshold above which growth starts to slow varies depending on whether a country is developed or developing, and also on the specific time period studied.

For example, in a study by Aydın et al. (2016) focusing on Central Asia and Azerbaijan, the inflation threshold was found to be 7.97%.

A 2018 paper by Hayat et al. aimed to identify the optimal inflation rate for sustainable growth in Pakistan. They found a threshold of 5%, and confirmed a non-linear relationshipbetween inflation and real GDP growth. According to their findings, the highest growth rates were observed when inflation ranged between 1% and 3%.

Taken together, these studies suggest that in developing countries like Kazakhstan, the inflation threshold should remain below 6%, while in developed countries, the optimal range is typically between 1% and 3%.

In parallel, researchers have also examined the conditions that help countries achieve low and stable inflation over the long term — especially in the context of inflation-targeting policies:

•  Ardakani et al. (2018) argue that inflation targeting improves fiscal discipline in both advanced and developing economies.

•  Jitmaneeroj et al. (2018) find that lower inflation levels can be achieved by increasing transparency in monetary policy and reducing uncertainty.

•  According to Murakami et al. (2018), the effectiveness of inflation policy is closely tied to public trust in central banks.

•  And Montes et al. (2018) show that in developing countries with inflation-targeting regimes, fiscal transparencyplays a key role in keeping inflation and expectations under control.

In summary:

The relationship between inflation and economic growth is complex and influenced by many factors — including a country’s development stage, macroeconomic policy, and institutional strength. Still, most evidence suggests that low and stable inflation is a necessary condition for long-term, sustainable growth.

Estimating the Optimal Inflation Rate for Kazakhstan’s Economy

The optimal level of inflation that supports sustainable economic growth in Kazakhstan was estimated using annual data from the country’s years of independence.

In addition to inflation, the model included other key variables such as oil prices, investment share in GDP, economic openness, and other important macroeconomic indicators. This is because inflation is not the only factor that can influence growth.

Many previous studies have also suggested that the relationship between inflation and economic growth is non-linear. This non-linearity shows up in two ways:

1. The distribution of countries by inflation levels is highly skewed. To address this, inflation data often needs to be transformed so that it more closely resembles a normal distribution.

Sarel (1996) proposed using a log transformation to reduce skewness, and Ghosh & Phillips (1998) showed that log-transforming inflation data gives better statistical results.

2. The second aspect of non-linearity is that low inflationmay have no clear effect — or even a positive effect — on growth, but once inflation passes a certain threshold, it begins to negatively impact growth.

This idea was first introduced by Fischer (1993) and confirmed in later studies, which found a structural break in the inflation-growth relationship. While all studies agree this break exists, the exact threshold varies.

Since inflation is approximately log-normal, some transformation is needed. However, a simple log transformation has limitations, especially when inflation is close to zero or negative (deflation), as the logarithmic function becomes undefined or tends toward negative infinity.

To avoid this, actual inflation data was split into two segments based on possible threshold values ranging from 5% to 8%. The effect of inflation on growth was then estimated using the following equation:

Equation (1):

GDP growth = f(macroeconomic factors, inflation level, threshold dummy)

Where:

•  y = GDP growth rate,

•  x = control variables (e.g., investment share, oil prices, openness),

•  d = dummy variable equal to 0 if inflation is below the threshold and 1 if above,

•  π = inflation rate,

•  β₁ = coefficient for high inflation (above the threshold),

•  β₂ = coefficient for low inflation (below the threshold).

The key assumption is that β₁ (high inflation) should be negative and statistically significant, meaning that higher inflation slows down growth. In contrast, β₂ (low inflation) should be statistically insignificant, meaning low inflation has no meaningful effect on growth.

The exact threshold value of inflation was unknown in advance, so a range of values (from 6% to 8%) was tested using Wald statistics to find the best-fitting model. The analysis was based on real data for 1995–2024, and real GDP figures were smoothed to reduce short-term volatility.

All variables were tested for stationarity using the Dickey-Fuller test, and the results confirmed that the time series data were stationary.

The best model fit was found when the inflation threshold was set at 6%.

Final Results:

•  The coefficient for inflation above 6% (CPI_MORE_6) is negative and statistically significant — meaning inflation above this level reduces GDP growth.

•  The coefficient for inflation below 6% (CPI_LESS_6) is not significant, suggesting that low inflation (under 6%) has no measurable effect on economic growth.

•  The included control variables were statistically significant and aligned with economic theory.

According to the analysis, the inflation threshold for Kazakhstan is 6%. Inflation above this level starts to slow down economic growth, while inflation below this level appears neutral in its effect. This supports the case for keeping inflation low and stable to maintain long-term growth.