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Threshold effects in the relationship between inflation and growth: a new panel-data approach

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  • David, Drukker
  • Pedro, Gomis-Porqueras
  • Paula, Hernandez -erme

Abstract

In this paper we use a new approach to throw light on the old question of the super-neutrality of money. Recent theoretical results suggest a threshold model instead of super-neutrality. To ascertain whether or not there is a threshold level of inflation above which the effect of inflation on long-run growth changes, we apply new econometric methods for estimation and inference in non-dynamic, fixed-effects, panel-data models that may contain threshold effects. In the full sample of 138 countries over the period 1950–2000, we find that there is one threshold that is well identified by the data; the estimated value of the threshold is 19.16%. For the industrialized sample, our results indicate that there are two threshold points at 2.57% and 12.61%. In the full sample, if the initial inflation rate is below 19.16%, increases in inflation do not have a statistically significant effect on growth. In contrast, when the initial inflation is above 19.16%, further increases in inflation will decrease long-run growth.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38225.

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Date of creation: 2005
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Handle: RePEc:pra:mprapa:38225

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Related research

Keywords: threshold model; nonlinear model; empirical growth; super-neutrality; panel data;

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References

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  1. Gonzalo, Jesus & Pitarakis, Jean-Yves, 2002. "Estimation and model selection based inference in single and multiple threshold models," Journal of Econometrics, Elsevier, Elsevier, vol. 110(2), pages 319-352, October.
  2. Jeffrey M. Wooldridge, 2001. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262232197, December.
  3. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
  4. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics, Boston College Department of Economics 365, Boston College Department of Economics.
  5. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 8(3), pages 387-393.
  6. João R. Faria & Francisco Galrão Carneiro, 2001. "Does High Inflation Affect Growth in the Long and Short Run?," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 89-105, May.
  7. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(3), pages 477-496, December.
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Citations

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Cited by:
  1. Max Gillman & Mark N Harris & Michal Kejak, 2007. "The Interaction of Inflation and Financial Development with Endogenous Growth," Money Macro and Finance (MMF) Research Group Conference 2006, Money Macro and Finance Research Group 29, Money Macro and Finance Research Group.
  2. Andrew Phiri, 2013. "An inquisition into bivariate threshold effects in the inflation-growth correlation: Evaluating South Africa’s macroeconomic objectives," Business and Economic Horizons (BEH), Prague Development Center, Prague Development Center, vol. 9(3), pages 1-11, October.
  3. Omay, Tolga & Öznur Kan, Elif, 2010. "Re-examining the threshold effects in the inflation-growth nexus with cross-sectionally dependent non-linear panel: Evidence from six industrialized economies," Economic Modelling, Elsevier, Elsevier, vol. 27(5), pages 996-1005, September.
  4. Godunova, M., 2010. "Influence of import tariffs, accumulation of FER and external debt on economic growth depending on stages of economic development," Journal of the New Economic Association, New Economic Association, New Economic Association, issue 5, pages 28-45.
  5. Hasanov, Fakhri, 2011. "Relationship between inflation and economic growth in Azerbaijani economy: is there any threshold effect?," MPRA Paper 33494, University Library of Munich, Germany.
  6. Nasir, Iqbal & Saima, Nawaz, 2010. "Investment, inflation and economic growth nexus," MPRA Paper 27163, University Library of Munich, Germany.
  7. Knobel, A., 2009. "Vertical Integration and Economic Growth: An Empirical Study," Journal of the New Economic Association, New Economic Association, New Economic Association, issue 3-4, pages 54-70.
  8. Raphael A. Espinoza & Ananthakrishnan Prasad & H. L. Leon, 2010. "Estimating the Inflation-Growth Nexus," IMF Working Papers 10/76, International Monetary Fund.
  9. repec:gua:wpaper:ec200903 is not listed on IDEAS
  10. Stephanie Kremer & Alexander Bick & Dieter Nautz, 2013. "Inflation and growth: new evidence from a dynamic panel threshold analysis," Empirical Economics, Springer, Springer, vol. 44(2), pages 861-878, April.
  11. Vinayagathasan, Thanabalasingam, 2013. "Inflation and economic growth: A dynamic panel threshold analysis for Asian economies," Journal of Asian Economics, Elsevier, Elsevier, vol. 26(C), pages 31-41.
  12. Danilo Trupkin & Raul Ibarra, 2011. "The Relationship between Inflation and Growth:A Panel Smooth Transition Regression Approach for Developed and Developing Countries," Documentos de Trabajo/Working Papers, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo. 1107, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
  13. Qi Gao & Jingping Gu & Paula Hernandez-Verme, 2012. "A Semiparametric Time Trend Varying Coefficients Model: With An Application to Evaluate Credit Rationing in U.S. Credit Market," Annals of Economics and Finance, Society for AEF, vol. 13(1), pages 189-210, May.
  14. Rathin Roy & Raquel Almeida Ramos, 2012. "IMF Article IV Reports: An Analysis of Policy Recommendations," Working Papers 86, International Policy Centre for Inclusive Growth.
  15. Combey, Adama & Nubukpo, Kako, 2010. "Effets Non Linéaires de l'Inflation sur la Croissance dans l'UEMOA
    [Nonlinear Effects of Inflation on Growth in the WAEMU]
    ," MPRA Paper 23542, University Library of Munich, Germany.
  16. Bonilla, Eugenio Diaz, 2008. "Global macroeconomic developments and poverty:," IFPRI discussion papers, International Food Policy Research Institute (IFPRI) 766, International Food Policy Research Institute (IFPRI).
  17. repec:gua:wpaper:em200902 is not listed on IDEAS

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