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

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

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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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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  1. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, June.
  2. 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.
  3. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
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