Inflation–growth nexus: evidence from a pooled CCE multiple-regime panel smooth transition model (original) (raw)
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2015
This paper analyses the empirical relationship between inflation and growth using a panel data estimation technique, Multiple Regime Panel Smooth Transition Regression (MR-PSTR), which takes into account the nonlinearities in the data. By using a panel data set for 10 African countries that permit us to control for unobserved heterogeneity at both country and time levels, we find that a statistically significant negative relationship exists between inflation and growth for the inflation rates above the critical threshold levels of 9% and 30% which are endogenously determined. Furthermore, we remedy the cross section dependence with the Common Correlated Effects (CCE) estimator. JEL Classification: C33, E31, O40
This paper studies the existence for a set of countries of an inflation threshold above which its effect on economic growth is negative, considering the speed of transition from one inflation regime to the other. Using a panel data set of above 120 countries for the period after the Second World War, we apply a panel smooth transition regression (PSTR) model with fixed effects. The estimated threshold of the inflation rate for industrialized countries is 4.1%, while for non-industrialized countries the threshold is 19.1%. The speed of transition is relatively smooth in the first group, but for developing economies inflation rapidly has negative effects on growth when it is near the threshold.
International Journal of Sustainable Economy, 2018
In this paper, we challenge the notion of a monotonic relationship between inflation and economic growth in South Africa. In particular, we establish threshold effects in the inflation-growth relationship using a smooth transition regression (STR) model which is applied on data collected between 2001: Q1 and 2016: Q2. Our empirical results confirm a threshold of 5.30% in which the effects of inflation on economic growth are positive below this threshold whereas inflation exerts adverse effect on economic growth at inflation levels above this level. In a nutshell, our study offers support in favour of the optimal level of inflation lying between the current 3-6% inflation target and more specifically suggests that the monetary authorities should slightly lower the upper level of this target to about 5.30% as a means creating a more conducive financial environment for promoting higher economic growth.
Inflation -Growth Nexus A Dynamic Panel Threshold Analysis for East African Economies
This paper aims to investigate the role of inflation on economic growth in East African Countries. Panel data over a period of about 26 years starting from 1990 to 2016 was used for six East African countries. A dynamic panel threshold model (DPTM) is introduced to estimate inflation thresholds for long-term economic growth and to test the existence of non-linear relationship between economic growth and inflation. The model allows the estimation of threshold effects with panel data that the existence of Endogeneit is taken into considerations. The estimated results confirm the existence of inflation threshold picking the threshold level to be 10.48 percent. The result confirms that inflation rates exceeding the threshold level (10.48%) are associated with lower economic growth. However, below this threshold, the correlations between the two variables remain insignificant. Since pushing the inflation rate down is always done at the expense of unemployment, government should make sure that they identified the right inflation rate to be achieved. 1.Background of the study Ensuring high and sustained economic growth along with low inflation is one of the major goals of almost all macroeconomic policies makers, government authorities and central banks. Stable price has a key role in determining the growth rate of an economy. To this end, monetary policies are adopted to maintain inflation at a desirable rate through monetary policy instruments. As argued by many scholars, a very high inflation is a drag to economic growth, whereas moderate inflation might accelerate growth (Temple (2000) cited in Little et al., (1993). In addition, Aiyagari (1990), as well as Cooley and Hansen (1991), suggest that the cost of lowering inflation toward zero is higher than the benefit. (Thanabalasingam V. 2013). In line with the above empirical results, macroeconomic theory also favors some acceptable level of inflation by arguing that inflation will play a positive role in the production process by substituting a downward movement of wage (since wage is downward sticky in most cases) and making labor to be cheaper (Mankiw, 2009). According to Kanchan Datta et al (2011) the impact of inflation on economic growth depends on its effect on investment and saving as the major determinants of economic growth are saving rate and investment. On the other hand Patrick Enu (2013) argues the persistent and continuous rise in general prices of goods and services over time, hinders efficient allocation of productive resource by complicating the signaling role of relative price changes which is an important guide to effective decision making. In addition to that, inflation makes an economy's exports relatively expensive to the rest of the world, and it causes balance of payments to deteriorate and country's international competitiveness to reduce. From the opposite pole, there are economists who argue that if excess demand arises due to the lack of sufficient technological change, bidding up relative prices in the production`sector; accompanied with price and wage floors in the economy then it will cause inflation to arise and if such factors are at the root of inflationary pressures, then monetary and fiscal policies can slow inflation only at a expense to economic development (Susan M. Wachter, 1979) Though economists and policy makers recognized the negative impact of inflation on economic growth, there is one obvious question which is remained unanswered: " if high inflation is detrimental to economic growth, then how low should it be? " Vikesh Gokal and Subrina Hanif (2004) responded to this question by saying there is no absolute answer to this question because it depends on the nature and structure of the economy and vary from one country to the other. There are plenty of research works on the relationship between economic growth and inflation; most of which uses the so called Vector Auto regressive Model (VAR) and Vector Error Correction Model (VECM) aiming to investigate the short run dynamics and the long run relationship between the two variables; L Krishna Veni et al, (2007), In addition to these models, simultaneous equation models are also frequently applied to approach the relationship of the two variables recognizing that inflation and economic growth might have a bi-directional relationship; Kenneth O. Obi et al (2016). Though, the models they used are relatively different, their conclusions have something in common that high level of inflation is generally growth unfriendly. Later on, researchers start
Inflation and Economic Growth in the SADC: Some Panel Time-Series Evidence
2013
In this paper we investigate the role of in ‡ation rates in determining economic growth in …fteen sub-Saharan African countries, which are all members of the Southern African Development Community (SADC), between 1980 and 2009. The results, based on panel time-series data and analysis, suggest that in ‡ation has had a detrimental e¤ect to growth in the region. All in all, we highlight not only the fact that in ‡ation has o¤set the Mundell-Tobin e¤ect and consequently reduced, the much needed, economic activity in the region, but also the importance of an institutional framework conducive to a stable macroeconomic environment as a precondition for development and prosperity in the community.
Economic Modelling, 2010
This paper analyzes the empirical relationship between inflation and output growth using a novel panel data estimation technique, Panel Smooth Transition Regression (PSTR) model, which takes account of the nonlinearities in the data. By using a panel data set for 6 industrialized countries that enable us to control for unobserved heterogeneity at both country and time levels, we find that there exists a statistically significant negative relationship between inflation and growth for the inflation rates above the critical threshold level of 2.52%, which is endogenously determined. Furthermore, we also control cross-section dependency by using the CD test modified to non-linear context and remedy cross-section dependency with Seemingly Unrelated Regression Equations through Generalized Least Squares (SURE-GLS) and newly proposed Common Correlated Effects (CCE) estimation techniques. We find that these methods change the critical threshold value slightly. The estimated threshold values from these estimation methods are 3.18% and 2.42%, respectively. 1 However, there are new improvments in theoretical growth models. have shown that the generalized solution of Romer's Technological change model is by using fractional calculus. Therefore, this new mathematical solutions can change the nature of the reduced form growth equation where this imporvement leads to reformalization of the inflation-growth nexus.
The Effect of Inflation on Growth - Evidence from a Panel of Transition Countries
2009
The paper examines the effect of inflation on growth in transition countries. It presents panel data evidence for 13 transition countries over the 1990-2003 period; it uses a fixed effects panel approach to account for possible bias from correlations among the unobserved effects and the observed country heterogeniety. The results find a strong, robust, negative effect on growth of inflation or its standard deviation, and one that appears to decline in magnitude as the inflation rate increases, as seen for OECD countries. And the results include a role for a normalized money demand in affecting growth, as well as for a convergence variable, a trade variable and a government share variable. And robustness of the baseline single equation model is examined by expanding this into a three equation simultaneous system of output growth, inflation and money demand that allows for possible simultaneity bias in the baseline model. A tanulmány az inflációnak a gazdaság növekedésére gyakorolt hatásait elemzi 13 átmeneti gazdaság 1990-2003 közötti adatai alapján. A nem vizsgált hatások és a megfigyelt országheterogenitások korrelációjából fakadó torzítások figyelembe vételére a vizsgálat az állandó hatású panel megközelítés módszerét alkalmazza. Az eredmények szerint az inflációnak illetve a szórásának erős negatív hatása van a növekedésre, s ennek nagysága az infláció növekedésével csökken, hasonlóan az OECD-országok tapasztalataihoz. A növekedés alakulásában szerepe van még a normalizált pénzkeresletnek, és olyan változóknak, amelyek a felzárkózást, a külkereskedelmet és a kormányzati kiadások arányát testesítik meg.
Inflation and Economic Growth: Evidence from the Southern African Development Countries
In this paper we investigate the role of in ‡ation rates in determining economic growth in …fteen sub-Saharan African countries, which are all members of the Southern African Development Community (SADC), between 1980 and 2009. The results, based on panel time-series data and analysis (we use the Fixed E¤ects and Fixed E¤ects with Instrumental Variables estimators to account for heterogeneity and endogeneity in thin panels), suggest that in ‡ation has had a detrimental e¤ect to growth in the community. We highlight that in ‡ation has o¤set the Mundell-Tobin e¤ect and consequently reduced the much needed economic activity in the community, and also the importance of an institutional framework conducive to a stable macroeconomic environment as a precondition for development and prosperity in the community.
Inflation and Economic Growth: Evidence from the Southern African Development Community
South African Journal of Economics, 2015
In this paper we investigate the role of in ‡ation rates in determining economic growth in …fteen sub-Saharan African countries, which are all members of the Southern African Development Community (SADC), between 1980 and 2009. The results, based on panel time-series data and analysis (we use the Fixed E¤ects and Fixed E¤ects with Instrumental Variables estimators to account for heterogeneity and endogeneity in thin panels), suggest that in ‡ation has had a detrimental e¤ect to growth in the community. We highlight that in ‡ation has o¤set the Mundell-Tobin e¤ect and consequently reduced the much needed economic activity in the community, and also the importance of an institutional framework conducive to a stable macroeconomic environment as a precondition for development and prosperity in the community.