Estimating the Inflation-Growth Nexus: A Smooth Transition Model

23 Pages Posted: 29 Mar 2010

See all articles by Raphael A. Espinoza

Raphael A. Espinoza

International Monetary Fund (IMF)

Hyginus Leon

International Monetary Fund (IMF)

A. Prasad

International Monetary Fund (IMF)

Date Written: March 2010

Abstract

Motivated by the global inflation episode of 2007-08 and concern that high levels of inflation could undermine growth, this paper uses a panel of 165 countries and data for 1960-2007 to revisit the nexus between inflation and growth. We use a smooth transition model to investigate the speed at which inflation beyond a threshold becomes harmful to growth, an important consideration in the policy response to rising inflation as the world economy recovers. We estimate that for all country groups (except for advanced countries) inflation above a threshold of about 10 percent quickly becomes harmful to growth, suggesting the need for a prompt policy response to inflation at or above the relevant threshold. For the advanced economies, the threshold is much lower. For oil exporting countries, the estimates are less robust, possibly reflecting heterogeneity among oil producers, but the effect of higher inflation for oil producers is found to be stronger.

Keywords: Cross country analysis, Developed countries, Economic growth, Economic models, Emerging markets, Inflation, Monetary policy, Oil exporting countries, Production growth

Suggested Citation

Espinoza, Raphael A. and Leon, Hyginus and Prasad, Ananthakrishnan, Estimating the Inflation-Growth Nexus: A Smooth Transition Model (March 2010). IMF Working Papers, Vol. , pp. 1-22, 2010. Available at SSRN: https://ssrn.com/abstract=1578674

Raphael A. Espinoza (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://oxford.academia.edu/RaphaelEspinoza

Hyginus Leon

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6115 (Phone)
202-589-6115 (Fax)

Ananthakrishnan Prasad

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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