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Estimating The Inflation–Growth Nexus—A Smooth Transition Model

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  • Mr. Raphael A Espinoza
  • Mr. Ananthakrishnan Prasad
  • Mr. Gene L. Leon

Abstract

Motivated by the global inflation episode of 2007-08 and concern that high levels of inflation could undermine growth, this paper uses a panel of 165 countries and data for 1960-2007 to revisit the nexus between inflation and growth. We use a smooth transition model to investigate the speed at which inflation beyond a threshold becomes harmful to growth, an important consideration in the policy response to rising inflation as the world economy recovers. We estimate that for all country groups (except for advanced countries) inflation above a threshold of about 10 percent quickly becomes harmful to growth, suggesting the need for a prompt policy response to inflation at or above the relevant threshold. For the advanced economies, the threshold is much lower. For oil exporting countries, the estimates are less robust, possibly reflecting heterogeneity among oil producers, but the effect of higher inflation for oil producers is found to be stronger.

Suggested Citation

  • Mr. Raphael A Espinoza & Mr. Ananthakrishnan Prasad & Mr. Gene L. Leon, 2010. "Estimating The Inflation–Growth Nexus—A Smooth Transition Model," IMF Working Papers 2010/076, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2010/076
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    Cited by:

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    2. Manamba EPAPHRA, 2016. "Nonlinearities in Inflation and Growth Nexus: The Case of Tanzania," Journal of Economics and Political Economy, KSP Journals, vol. 3(3), pages 471-512, September.
    3. Mavikela Nomahlubi & Mhaka Simba & Phiri Andrew, 2019. "The Inflation-Growth Relationship in SSA Inflation-Targeting Countries," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 64(2), pages 84-102, August.
    4. Ibarra, Raul & Trupkin, Danilo R., 2016. "Reexamining the relationship between inflation and growth: Do institutions matter in developing countries?," Economic Modelling, Elsevier, vol. 52(PB), pages 332-351.
    5. Ndoricimpa Arcade, 2017. "Working Paper 249 - Threshold Effects of Inflation on Economic Growth in Africa: Evidence from a Dynamic Panel Threshold Regression," Working Paper Series 2359, African Development Bank.
    6. repec:asi:ajoerj:2013:p:363-380 is not listed on IDEAS
    7. Ciżkowicz, Piotr & Rzońca, Andrzej, 2010. "Inflation and corporate investment in selected OECD countries in the years 1960-2005 – an empirical analysis," MPRA Paper 29846, University Library of Munich, Germany.
    8. Klachkova, Olga A. (Клачкова, Ольга), 2017. "Modelling the Impact of Inflation on Economic Growth for Countries with Different Levels of Economic Freedom [Влияние Инфляции На Экономический Рост В Зависимости От Уровня Экономической Свободы Ст," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 22-41, October.
    9. Madhu Sehrawat & A. K. Giri, 2015. "Re-examining the Threshold Effects in Inflation–Growth Nexus: Evidence from India," International Journal of Economics and Empirical Research (IJEER), The Economics and Social Development Organization (TESDO), vol. 3(2), pages 57-67, Fabruary.
    10. Ashagrie Demile, 2016. "Inflation Growth nexus in Ethiopia Evidence from Threshold Auto Regressive Model," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 24(1), April.
    11. Isabel Ortiz & Jingqing Chai & Matthew Cummins, 2011. "Identifying Fiscal Space:Options for Social and Economic Development for Children and Poor Households in 184 Countries," Working papers 1108, UNICEF,Division of Policy and Strategy.
    12. Samir Ghazouani, 2012. "Threshold Effect of Inflation on Growth: Evidence from MENA Region," Working Papers 715, Economic Research Forum, revised 2012.
    13. Thouraya BOUJELBENE, 2021. "Nonlinearity Relationship of Inflation and Economic Growth: Role of Institutions Quality," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 166-179, December.
    14. Irfan ul Haque & Sahar Amjad, 2012. "Toward a Heterodox Approach: Reconciling Stabilization and Economic Growth in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 17(Special E), pages 1-32, September.
    15. Mansoorian, Arman & Mohsin, Mohammed, 2013. "Real asset returns, inflation and activity in a small, open, Cash-in-Advance economy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 234-250.
    16. 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.
    17. E. Sinelnikova-Muryleva V. & A. Grebenkina M. & Е. Синельникова-Мурылева В. & А. Гребенкина М., 2019. "Оптимальная инфляция и инфляционное таргетирование: страновой опыт // Optimal Inflation and Inflation Targeting: International Experience," Финансы: теория и практика/Finance: Theory and Practice // Finance: Theory and Practice, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, vol. 23(1), pages 49-65.

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