| This research reexamines the link between inflation and GDP growth in sample groups of developed economies and developing economies.It is widely known that the effects of inflation on economic growth can either be positive,negative or insignificant.Nonetheless,most studies view high levels of inflation to be negatively affecting economic growth because of the uncertainty associated to high inflation levels.The uncertainty brought by inflation has negative effect on economic growth because uncertainties discourage investments,which in turn will decrease economic growth.This paper is based on the panel threshold model of Hansen(1999),which applies panel threshold regression in identifying the existence of threshold effect.Unlike the paper of Hansen(1999)which tested whether financial constraints affect investment decisions for a sample of 565 US firms,this paper tests the existence of threshold effect for a sample groups of developed and developing countries and also subgroups of countries identified according to institutional quality.This paper investigates a balance panel dataset of 85 countries,which 31 developed countries and 54 developing countries,for threshold effect using panel threshold regression.The paper finds strong evidence of threshold effect for both sample groups of countries developed and developing countries.Base from the results,the paper estimates a threshold level of about 6.02 percent in developed countries,and a threshold level of about 9.22 percent in developing economies.When levels of inflation do not exceed the threshold level of inflation,this paper finds rates of inflation to have a positive,but insignificant effect on economic growth in the sample group of developed economies.Meanwhile,the impact of inflation above the threshold level is negative,and significant.On the contrary,inflation has a positive and significant effect on economic growth when inflation is below the threshold level for sample group of developing countries.And similarly,inflation has a negative and significant effect on economic growth when the level of inflation is above the threshold level.Interestingly,this paper also finds evidence of threshold effect for subgroups of countries identified according to institutional quality such as Index of Financial Development by the International Monetary Fund and Democracy index by The Economist Intelligence Unit.Base from the results,higher levels of financial development are associated to lower levels of inflation threshold in developed economies. |
