The Rule of Law and Inflation Rate Nexus: Some Evidence from Selected MENA Countries

This study investigates the effect of rule of law on inflation rate for the 16 selected MENA countries over the period of 1996-2012. The relationship between variables has been estimated by applying Panel Smooth Transition Regression (PSTR) model and using Non-linear Least Squares (NLS) method of estimation. Our results reject the linearity hypothesis, and indicate existence of one continuous transition function with two regimes that gives a threshold at rule of law index of -0.525. Moreover, the results show that the rule of law index, openness index and GDP per capita have negative impact on inflation rate in two regimes that the intensity of the negative impact of these variables increases in the second regime. On the other hand, government consumption expenditure and liquidity have a positive impact on inflation rate in two regimes; the intensity of their positive impact reduces in the second regime. Therefore, the actions such as creating innovative mechanisms for dispute resolution, stabilization in government's plans and objectives and no chain changes in policies enhance the rule of law levels and decrease the inflation rate in this group of countries.