Working Paper 249 - Threshold Effects of Inflation on Economic Growth in Africa: Evidence from a Dynamic Panel Threshold Regression

Arcade Ndoricimpa

Working Paper Series from African Development Bank

Abstract: This study examines nonlinearities in the inflation-growth nexus in Africa. A dynamic panel threshold regression is applied to account for the potential endogeneity bias in the model. The findings of this study confirm the existence of nonlinearities in the inflation-growth nexus. An inflation threshold of 6.7% is estimated for the whole sample, 9% for the sub-sample of low-income countries and 6.5% for middle-income countries. The findings suggest that low inflation is growth-enhancing for the sub-sample of middle-income countries but neither affects economic growth for the whole sample nor for the sub-sample of low-income countries. However, inflation above the threshold is detrimental to economic growth for all the cases considered. The findings of this study may be useful to African monetary policymakers as they decide on inflation targets to adopt to avoid the detrimental effects of high inflation while reaping the growth benefits of low inflation.

Date: 2017-02-16
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