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Re-examining the threshold effects in the inflation-growth nexus with cross-sectionally dependent non-linear panel: Evidence from six industrialized economies

  • Omay, Tolga
  • Öznur Kan, Elif

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 non-linearities 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.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 27 (2010)
Issue (Month): 5 (September)
Pages: 996-1005

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Handle: RePEc:eee:ecmode:v:27:y:2010:i:5:p:996-1005
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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