Nonlinear effects of inflation on economic growth in selected Sub-Saharan African Countries: Are the level of economic development, geographical area, and currency zone relevant?
Keywords:
Threshold of Inflation, PSTR Model, Monetary Policy, Growth, WelfareAbstract
The objective of this paper is to estimate the optimal inflation rate, defined as the rate below and above which inflation differentially affects economic growth in SSA countries. To do so, we apply a Panel Smooth Transition Regression (PSTR) model, developed by González et al. (2005), on data covering the period 2000-2019 for 30 SSA countries. Our results indicate first that the relationship between inflation and growth in SSA is nonlinear. Second, the optimal inflation rate for SSA is around 11.64 percent. Third, the inflation thresholds differ from one zone to another: 10.06 percent for Southern Africa, 4.39 percent for the Central African Economic and Monetary Community (CEMAC) countries, 6.19 percent for East Africa, 11.58 percent for the Economic Community of West African States (ECOWAS) countries, and 3.93 percent for the West African Economic and Monetary Union (WAEMU) countries. Fourth, the estimated optimal thresholds are sensitive to a number of macroeconomic variables such as public investment spending, the level of financial development, and trade openness. Sensitivity analyses and estimation using the GMM method show that these results are robust.
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