Abstract
We introduce a dynamic panel threshold model to estimate inflation thresholds for long-term economic growth. Advancing on Hansen (J Econom 93:345–368, 1999) and Caner and Hansen (Econom Theory 20:813–843, 2004), our model allows the estimation of threshold effects with panel data even in case of endogenous regressors. The empirical analysis is based on a large panel-dataset including 124 countries. For industrialized countries, our results confirm the inflation targets of about 2% set by many central banks. For non-industrialized countries, we estimate that inflation rates exceeding 17% are associated with lower economic growth. Below this threshold, however, the correlation remains insignificant.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Arellano M, Bover O (1995) Another look at the instrumental variables estimation of error-components models. J Econom 68: 29–51
Bick A (2010) Threshold effects of inflation on economic growth in developing countries. Econ Lett 108(2): 126–129
Bick A, Nautz D (2008) Inflation Thresholds and relative price variability: evidence from U.S. cities. Int J Cent Bank 4(3): 61–76
Blanchard O, Dell’Ariccia G, Mauro P (2010) Rethinking macroeconomic policy. IMF staff position note SPN/10/03
Bruno M, Easterly W (1998) Inflation crisis and long-run growth. J Monet Econ 41: 3–26
Burdekin RC, Arthur T, Denzau MWK, Sitthiyot T, Willet TD (2004) When does inflation hurt economic growth? Different nonlinearities for different economies. J Macroecon 26(3): 519–532
Caner M, Hansen BE (2004) Instrumental variable estimation of a threshold model. Econom Theory 20: 813–843
Caselli F, Esquivel G, Lefort F (1996) Reopening the convergence debate: a new look at cross-country growth empirics. J Econ Growth 1(3): 363–389
Cuaresma JC, Silgoner MA (2004) Growth effects of inflation in Europe: How low is too low, how high is too high? Working Paper, University of Vienna, Vienna
Drukker D, Gomis-Porqueras P, Hernandez-Verme P (2005) Threshold effects in the relationship between inflation and growth: a new panel-data approach. Working Paper, University of Texas
Foster N (2006) Exports, growth and threshold effects in Africa. J Dev Stud 42(6): 1056–1074
Ghosh A, Phillips S (1998) Warning: inflation may be harmful to your growth. IMF Staff Papers 45(4): 672–710
Goncalves CES, Salles JM (2008) Inflation targeting in emerging economies: what do the data say?. J Dev Econ 85: 312–318
Hansen BE (1999) Threshold effects in non-dynamic panels: estimation, testing, and inference. J Econom 93: 345–368
Hansen BE (2000) Sample splitting and threshold estimation. Econometrica 68(3): 575–603
Hineline DR (2007) Examining the robustness of the inflation and growth relationship. South Econ J 73(4): 1020–1037
Khan MS, Senhadji AS (2001) Threshold effects in the relationship between inflation and growth. Technical Report, IMF Staff Papers 48
Khan MS, Senhadji AS, Smith BD (2006) Inflation and financial depth. Macroecon Dyn 10(2): 165–182
Levine R, Renelt D (1992) A sensitivity analysis of cross-country growth regressions. Am Econ Rev 82(4): 942–963
Lin S, Ye H (2009) Does inflation targeting make a difference in developing countries?. J Dev Econ 89: 118–123
Omay T, Kan E (2010) Re-examining the threshold effects in the inflation growth nexus with cross-sectionally dependent non-linear panel: evidence from six industrialized economies. Econ Model 27(5): 996–1005
Roodman D (2009) A Note on the theme of too many instruments. Oxf Bull Econ Stat 71(1): 135–158
Sala-i-Martin X (1997) I just ran two million regressions. Am Econ Rev 87: 178–183
Temple J (2000) Inflation and growth: stories short and tall. J Econ Surv 14(4): 395–426
Vaona A (2012) Inflation and growth in the long run: a new keynesian theory and further semiparametric evidence. Macroecon Dyn 16(1): 94–132
Vaona A, Schiavo S (2007) Nonparametric and semiparametric evidence on the long-run effects of inflation on growth. Econ Lett 94: 452–458
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Kremer, S., Bick, A. & Nautz, D. Inflation and growth: new evidence from a dynamic panel threshold analysis. Empir Econ 44, 861–878 (2013). https://doi.org/10.1007/s00181-012-0553-9
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-012-0553-9