Inflation and economic growth: A dynamic panel threshold analysis for Asian economies

Abstract

This paper investigates the existence of a threshold level for inflation and how any such level affects the growth of Asian economies. We used dynamic panel threshold growth regression, which allowed us to work with fixed effect and endogeneity issues. We observed a nonlinear relationship between inflation and economic growth for 32 Asian countries over the period 1980-2009. We detected an inflation threshold of approximately 5.43%, at a 1% level of significance. We found that inflation hurts growth when it exceeds 5.43% but has no effect below this level. Different estimation methods determined that the effect of inflation on growth is robust. Our findings may be useful to central banks as a guide for inflation targeting.

Robust determinants of growth in Asian developing economies: A Bayesian panel data model averaging approach

“…These conclusions are consistent with Vinayagathasan (2013), who analyzed a similar dataset using GMM estimation.…”

Threshold effects of inflation on growth in the ASEAN-5 countries: A Panel Smooth Transition Regression approach

“…At what level is inflation detrimental to long-term economic growth? Answering these questions, it is not surprising that optimal level of inflation is detected in several recent empirical studies (see Ghosh & Phillips, 1988;Sarel, 1996;Khan & Senhadji, 2001;Bick, 2010;Seleteng et al, 2013;Vinayagathasan, 2013;Baglan & Yoldas, 2014;Eggoh & Khan, 2014). Optimal level or threshold level of inflation is at inflexion point which positive effects of inflation on growth exist when the inflation rate is low and negative effects when the inflation rate is high (Seleteng et al, 2013).…”

“…The relationship between inflation and economic growth is the subject that has long been intensely E-mail address: dinhthanh@ueh.edu.vn discussed and debated in the literature (López-Villavicencio & Mignon, 2011). A high economic growth in relation with low and stable inflation is the main objective of macroeconomic policy (Khan & Senhadji, 2001;Seleteng, Bittencourt, & van Eyden, 2013;Vinayagathasan, 2013). Some studies provide evidence that inflation has negative impact on medium and long run growth (Khan & Senhadji, 2001).…”

Inflation-Growth Nexus in Botswana: Can Lower Inflation Really Spur Growth in the Country?

“…A vast majority of the earlier empirical literature based their empirical estimates on panels consisting of both developing and developed economies (Fischer (1993), Barro (1995), Bruno andEasterly (1998), Sarel (1996), Ghosh and Phillips (1998) and Kahn and Senhadji (2001), Drukker et al (2005), Hineline (2007), Kremer et. (2009), Vaona (2012, Vinayagathasan (2013), Seleteng et al (2013), Eggoh and Kahn (2014), Ibarra and Trupkin (2016) and Ndoricimpa (2017)). Notably these studies advocate for a negative effect of inflation on economic growth in both developed and developing economies, although inflation was deemed to have a stronger adverse effect in industrialized economies.…”