This paper examines the inflation-growth interaction for different country groups with similar national incomes for the period 1970-2011. It could be confirmed that this relation is strictly nonlinear with a threshold level of inflation of 3% for high-income countries and 13% for low-income countries. Although this result is in line with previous empirical studies based on
a similar data set, much smaller samples needed to be used to obtain these results. Inflation threshold levels are estimated using the iteration method and different panel-specific techniques. Strongly significant thresholds were yielded only when controlling for country-fixed effects. Policymakers can use the findings for high-income or industrialised countries as a guide for inflation targeting, however more precise analyses for less advanced countries are needed in order to be useful for monetary policy.
Table of Contents
1 Introduction
2 Inflation and Economic Growth in Developing vs. Developed Countries
3 Literature Review
4 Motivation
5 Theoretical Background
5.1 Effect of Inflation on the Balanced-Growth Path
5.2 Nonlinearity in the Inflation-Growth Nexus
6 The Methodology
6.1 The Data
7 Results
7.1 OLS
7.2 Panel Regressions
7.2.1 Two-way Fixed Effects
7.2.2 Mean Group Estimator
7.2.3 Common Correlated Effects MG estimator
8 Conclusion and Further Discussion
Research Objectives and Themes
This dissertation investigates the existence and nature of a non-linear relationship between inflation and economic growth across a diverse panel of 154 countries over the period 1970–2011. The research seeks to identify specific inflation threshold levels for different country groups categorized by national income, aiming to determine the turning point where inflation transitions from potentially beneficial or neutral to harmful for economic growth.
- Analysis of the nonlinear inflation-growth nexus across varying levels of economic development.
- Application of iteration methodologies to determine structural breaks in inflation-growth data.
- Evaluation of the impact of panel-specific estimation techniques (Fixed Effects, MGE, CCEMGE) on threshold accuracy.
- Comparative assessment of high-income, middle-income, and low-income country subgroups.
- Implications for monetary policy and inflation targeting strategies.
Excerpt from the Book
Effect of Inflation on the Balanced-Growth Path
We assume a constant-returns-to-scale (CRS) goods sector that uses only physical capital and effective labour. The representative agent, who works in this sector, utilises resources for CRS human capital production with investment of capital and effective labour, as well as for the credit services sector, which is subject to the cash-in-advance constraint, also employing effective labour in a diminishing returns technology. He maximises his utility over goods and leisure subject to four constraints: 1) the flow of human capital; 2) the flow of financial capital; 3) the stock of financial capital; 4) the exchange technology.
Goods are produced by the following production function: y_t = A_G(S_Gt k_t)^(1-beta)(L_Gt h_t)^beta, and its first-order conditions with respect to real wages and real interest rate: r_t = (1 - beta)A_G[(S_Gt k_t)/(L_Gt h_t)]^(1-beta), w_t = beta A_G[(S_Gt k_t)/(L_Gt h_t)]^(1-beta). The consumer maximises his current period utility function subject to the four constraints listed above: u(c_t, x_t) = c_t^(1-theta) x_t^(alpha(1-theta))/(1-theta).
Summary of Chapters
1 Introduction: Provides an overview of the macroeconomic objective to balance growth and inflation, identifying the research gap concerning non-linear thresholds in inflation-growth dynamics.
2 Inflation and Economic Growth in Developing vs. Developed Countries: Discusses the differing impacts of inflation on economic agents, depending on financial development and the economic structure of countries.
3 Literature Review: Synthesizes previous empirical studies on the inflation-growth nexus, highlighting various methodologies and the evolution of threshold estimation techniques.
4 Motivation: Argues for the necessity of analyzing income-specific country samples over a more recent time period to clarify mixed findings in existing research.
5 Theoretical Background: Outlines the mathematical framework for an endogenous growth model, explaining how inflation influences growth indirectly through consumption, leisure, and credit mechanisms.
6 The Methodology: Details the empirical strategy, including the construction of the inflation function, the iteration approach, and the specific data usage for the 154-country panel.
7 Results: Presents and discusses the outcomes of the OLS, Fixed Effects, Mean Group, and CCEMG estimations across the seven specified country groups.
8 Conclusion and Further Discussion: Synthesizes the findings, offering policy recommendations and acknowledging the limitations of current threshold models for heterogeneous country groups.
Keywords
Inflation, Economic Growth, Nonlinearity, Threshold Effect, Panel Data, Developing Countries, Developed Countries, Monetary Policy, Iteration Methodology, Fixed Effects, Mean Group Estimator, Macroeconomics, Capital Accumulation, GDP, Inflation Targeting.
Frequently Asked Questions
What is the core focus of this dissertation?
The dissertation examines the nonlinear relationship between inflation rates and real GDP growth per capita across a panel of 154 countries from 1970 to 2011.
What are the primary thematic areas covered?
The study covers the theoretical effects of inflation on growth, the role of income-level categorization in defining inflation thresholds, and the application of various panel econometric techniques.
What is the primary research goal?
The goal is to determine specific, statistically significant inflation threshold levels for distinct country income groups to guide appropriate monetary policy.
Which scientific methods are employed?
The author uses iterative estimation methods to minimize the sum of squared residuals, complemented by OLS, two-way fixed effects, Mean Group (MG), and Common Correlated Effects Mean Group (CCEMG) estimators.
What does the main body discuss?
The main body transitions from a theoretical derivation of an endogenous growth model with money-credit choices to a robust empirical application on multiple country subgroups.
Which keywords characterize this research?
Key terms include inflation-growth nexus, nonlinearity, threshold level, panel econometrics, and income-specific country samples.
How does income level affect the inflation-growth relationship?
The study finds that countries with higher national incomes generally require much lower inflation thresholds (around 3%) compared to lower-income countries, which tolerate higher inflation levels before growth is hindered.
Why does the author differentiate between country groups?
The author argues that pooling all countries together obscures the distinct economic dynamics and institutional differences, leading to imprecise threshold estimates that are not useful for policy.
- Citar trabajo
- Anna Miller (Autor), 2013, Nonlinear Relation Between Inflation and Growth – Panel Data Analysis, Múnich, GRIN Verlag, https://www.grin.com/document/263454
