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The Relationship between Inflation and Growth:A Panel Smooth Transition Regression Approach for Developed and Developing Countries

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  • Danilo Trupkin

    ()

  • Raul Ibarra

Abstract

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 xed 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. In addition, we find that the in ation threshold falls to 7.9% by selecting a reduced group of developing countries, according to a measure associated with institutional quality.

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Bibliographic Info

Paper provided by Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo. in its series Documentos de Trabajo/Working Papers with number 1107.

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Date of creation: 2011
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Handle: RePEc:mnt:wpaper:1107

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Postal: Prudencio de Pena 2440, Montevideo 11600
Web page: http://www.um.edu.uy/cee/
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Related research

Keywords: Inflation; economic growth; treshold effects; smooth transition.;

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References

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  1. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
  2. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
  3. Andres Gonzalez & Timo Terasvirta & Dick van Dijk, 2005. "Panel Smooth Transition Regression Models," Research Paper Series 165, Quantitative Finance Research Centre, University of Technology, Sydney.
  4. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
  5. Andrea Vaona & Stefano Schiavo, 2006. "Nonparametric and Semiparametric Evidence on the Long-Run Effects of Inflation on Growth," Kiel Working Papers 1286, Kiel Institute for the World Economy.
  6. Caner, Mehmet & Hansen, Bruce E., 2004. "Instrumental Variable Estimation Of A Threshold Model," Econometric Theory, Cambridge University Press, vol. 20(05), pages 813-843, October.
  7. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
  8. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  9. Kremer, Stephanie & Bick, Alexander & Nautz, Dieter, 2009. "Inflation and growth: new evidence from a dynamic panel threshold analysis," Discussion Papers 2009/9, Free University Berlin, School of Business & Economics.
  10. Gilbert Colletaz & Christophe Hurlin, 2006. "Threshold Effects of the Public Capital Productivity : An International Panel Smooth Transition Approach," Working Papers halshs-00008056, HAL.
  11. Gonzalo, Jesus & Pitarakis, Jean-Yves, 2002. "Estimation and model selection based inference in single and multiple threshold models," Journal of Econometrics, Elsevier, vol. 110(2), pages 319-352, October.
  12. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
  13. Raphael A. Espinoza & Ananthakrishnan Prasad & H. L. Leon, 2010. "Estimating The Inflation-Growth Nexus - A Smooth Transition Model," IMF Working Papers 10/76, International Monetary Fund.
  14. David, Drukker & Pedro, Gomis-Porqueras & Paula, Hernandez -erme, 2005. "Threshold effects in the relationship between inflation and growth: a new panel-data approach," MPRA Paper 38225, University Library of Munich, Germany.
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Cited by:
  1. Katharina Pijnenburg, 2013. "The Spatial Dimension of US House Price Developments," Discussion Papers of DIW Berlin 1270, DIW Berlin, German Institute for Economic Research.
  2. Lena Dräger & Jan-Oliver Menz & Ulrich Fritsche, . "Perceived Inflation under Loss Aversion," Macroeconomics and Finance Series 201105, Hamburg University, Department Wirtschaft und Politik.

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