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Inflation–growth nexus: evidence from a pooled CCE multiple-regime panel smooth transition model

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Abstract

This paper analyses the empirical relationship between inflation and growth using a panel data estimation technique, multiple-regime panel smooth transition regression, which takes into account the nonlinearities in the data. By using a panel data set for 10 countries in the Southern African Development Community permitting us to control for unobserved heterogeneity at both country and time levels, we find that a statistically significant negative relationship exists between inflation and growth for inflation rates above the critical threshold levels of 12 and 32% which are endogenously determined. Furthermore, we remedy the cross-section dependence with the common correlated effects estimator.

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Notes

  1. The Southern African Development Community (SADC) was established as a development coordinating conference (SADCC) in 1980 and transformed into a development community in 1992. The SADC is an intergovernmental organization whose goal is to promote sustainable and equitable economic growth and socioeconomic development through efficient productive systems, deeper cooperation and integration, good governance and durable peace and security among Southern African member states (SADC 2016).

  2. The threshold estimation technique was developed by Chan and Tsay (1998) and extended to panel data estimation by Hansen (1999, 2000).

  3. Drukker et al. (2005) state that “In cross-sectional growth literature, some of these variables are treated as endogenous and instrumental (IV) estimates are used. The method used in this paper has not yet been extended to the case of instrumental variables. This paper assumes that any endogenous component are perfectly correlated with fixed effects, and therefore controlled by our fixed effect estimation procedure.” Moreover, they exclude initial income from their growth regression to avoid the endogeneity problem.

  4. These countries include Botswana, Lesotho, Madagascar, Mauritius, Malawi, Namibia, Republic of South Africa, Swaziland, Seychelles and Tanzania.

  5. For more detailed discussion, see González et al. (2005).

  6. See Omay and Kan (2010) for details.

  7. We use the bootstrap version of the IPS test which is proposed in Ucar and Omay (2009) where the authors follow Chang (2004). UO and EO tests also use bootstrap methods for remedying cross-section dependence. See Ucar and Omay (2009) and Emirmahmutoğlu and Omay (2014) for further discussion.

  8. A similar simulation study for remedying cross-section dependence in nonlinear panel models is done by Emirmahmutoğlu (2014).

  9. For the single transition variable the estimation results are available upon request.

  10. Most probably this issue leads to a convergence problem in nonlinear estimation; however, these kinds of problems are not studied extensively in the literature due to the reason that the nonlinear estimations are still premature and an emerging field in econometrics. However, dominant threshold estimation in the case of second dominance by another threshold value should have been studied explicitly.

  11. These three countries are Madagascar, Malawi and Tanzania where all three countries have experienced periods of hyperinflation in the past.

  12. As we know from the nonlinear panel data literature, the linearity test is labeled as a homogeneity test. This terminology directly indicates that the nonlinearity is coming from the heterogeneity of countries included in to sample.

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Authors and Affiliations

  1. Department of Economics, Atılım University, Kızılcaşar Mahallesi, 06836, İncek, Gölbaşı, Ankara, Turkey

    Tolga Omay

  2. Department of Economics, University of Pretoria, 0002, Pretoria, South Africa

    Reneé van Eyden & Rangan Gupta

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  1. Tolga Omay
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  2. Reneé van Eyden
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  3. Rangan Gupta
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Correspondence to Reneé van Eyden.

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Omay, T., van Eyden, R. & Gupta, R. Inflation–growth nexus: evidence from a pooled CCE multiple-regime panel smooth transition model. Empir Econ 54, 913–944 (2018). https://doi.org/10.1007/s00181-017-1237-2

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