Examining The Non-Linearities In Inflation-Growth Nexus: Further Evidence From a Fixed-Effect Panel Threshold Regression Approach For The Sacu Region

Abstract

This paper considers the contentious issue regarding the relationship between inflation and economic growth in a context of the world's first customs union - Southern African Customs Union (SACU). It examines the non-linear relationship between inflation and growth using a Panel Threshold Regression (PTR) on a dataset over the period 1980 to 2016. The study rejects the null hypothesis of a linear relationship between inflation and growth and that there exists a statistically significant negative impact of inflation on growth when inflation rates rise above the threshold of 10.2%. We also found that the size of the growth effect of inflation is stronger in the upper inflation regime. Descriptive results from our threshold variance analysis show that variance in inflation rates is higher when inflation is above the threshold level and this is mostly associated with higher variance in growth. Taken together, these findings imply that stable economic growth may be achieved by keeping inflation below the threshold to attract both domestic and foreign investment while individual governments imbibe fiscal discipline as means of controlling inflationary pressures created by rising government consumption.