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Re-examining the threshold effects in the inflation-growth nexus with cross-sectionally dependent non-linear panel: Evidence from six industrialized economies

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2010

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Elsevier Science Bv

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Abstract

This paper analyzes the empirical relationship between inflation and output growth using a novel panel data estimation technique, Panel Smooth Transition Regression (PSTR) model, which takes account of the non-linearities in the data. By using a panel data set for 6 industrialized countries that enable us to control for unobserved heterogeneity at both country and time levels, we find that there exists a statistically significant negative relationship between inflation and growth for the inflation rates above the critical threshold level of 2.52%, which is endogenously determined. Furthermore, we also control cross-section dependency by using the CD test modified to non-linear context and remedy cross-section dependency with Seemingly Unrelated Regression Equations through Generalized Least Squares (SURE-GLS) and newly proposed Common Correlated Effects (CCE) estimation techniques. We find that these methods change the critical threshold value slightly. The estimated threshold values from these estimation methods are 3.18% and 2.42%, respectively. (C) 2010 Elsevier B.V. All rights reserved

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Inflation, Growth, Threshold Effects, Panel Smooth Transition Model, Cross-section Dependency, Common Correlated Effects

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Citation

Omay, T. Kan, E.Ö. (2010). Re-examining the threshold effects in the inflation-growth nexus with cross-sectionally dependent non-linear panel: Evidence from six industrialized economies. Economic Modelling, 27(5), 996-1005. http://dx.doi.org/10.1016/j.econmod.2010.04.011

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Source

Economic Modelling

Volume

27

Issue

5

Start Page

996

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1005