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

Author

Listed:
  • 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.

Suggested Citation

  • 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.
  • Handle: RePEc:pra:mprapa:38225
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    File URL: https://mpra.ub.uni-muenchen.de/38225/1/MPRA_paper_38225.pdf
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    References listed on IDEAS

    as
    1. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
    2. 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.
    3. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, January.
    4. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December.
    5. 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.
    6. 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.
    7. 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. 4, pages 89-105, May.
    8. Nazrul Islam, 1995. "Growth Empirics: A Panel Data Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 1127-1170.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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