Estimating The Inflation–Growth Nexus—A Smooth Transition Model
IMF Working Papers, March 1, 2010
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Bibliographic details
- Authors: Raphael A Espinoza, Ananthakrishnan Prasad, Gene L. Leon
- Published: March 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451982190.001
Summary
- Motivated by the global inflation episode of 2007-08 and concern that high levels of inflation could undermine growth.
- Uses a panel of 165 countries and data for 1960-2007.
- Employs a smooth transition model to investigate the speed at which inflation beyond a threshold becomes harmful to growth.
- Focuses on the policy relevance of how quickly inflation turns harmful as the world economy recovers.
Methodology
- Empirical approach: smooth transition model applied to panel data of 165 countries for 1960-2007.
- Purpose: identify inflation threshold(s) and the speed at which inflation above the threshold affects growth.
Key Findings
- For all country groups (except for advanced countries), inflation above a threshold of about 10 percent quickly becomes harmful to growth.
- For advanced economies, the inflation threshold is much lower (no specific numeric threshold reported).
- For oil exporting countries:
- Estimates are less robust, possibly reflecting heterogeneity among oil producers.
- The effect of higher inflation for oil producers is found to be stronger.
Policy Implications and Recommendations
- The rapid adverse effect of inflation above the relevant threshold suggests the need for a prompt policy response to inflation at or above that threshold.
- Policy relevance differs by country group:
- Non-advanced country groups: act promptly when inflation approaches or exceeds about 10 percent.
- Advanced economies: heed a much lower threshold for inflation-induced harm to growth.
- Oil exporters: recognize heterogeneous responses across producers and the potentially stronger negative effect of higher inflation.
Subject Tags and Keywords
- Subject: Emerging and frontier financial markets, Inflation, Oil, Population growth, Terms of trade
- Keywords: growth-inflation literature, growth-inflation relationship, inflation threshold, inflation-growth literature, WP
Raphael A Espinoza, Ananthakrishnan Prasad, and Gene L. Leon, "Estimating The Inflation–Growth Nexus—A Smooth Transition Model", March 1, 2010. DOI: https://doi.org/10.5089/9781451982190.001
Content in this bundle
- _wp1076 - Appendix A. Country Groups