Threshold effects of inflation on the financial development-economic growth nexus in Tunisia

Abstract

The main purpose of this paper was to ascertain the effect of inflation on the growth-enhancing role of financial development assuming a non-linearity relationship between finance and growth under different inflation regimes. The empirical study was carried out using the threshold regression model over the period of the first month of 1982 to the twelfth month of 2018. We found a strong evidence of a threshold effect (4.89%) which modifies the impact of financial deepening on growth in Tunisia. If the inflation rate falls below 4.89%, financial depth stimulates economic growth. However, this effect is weakened as inflation rate grows. Oppositely, credit growth of commercial banks is not efficient enough to contribute to economic growth. Thus, high inflation disrupts the growth-enhancing role of finance in Tunisia. Practically, the Tunisian monetary authorities are recommended to keep an inflation rate under 4.89% to reach a sustainable growth through financial development.