Threshold Effects of Inflation on Growth in D8 Countries: A Panel Smooth Transition Regression Approach

The relationship between inflation and economic growth is a contentious issue. The present study aimed to test the hypothesis that the relationship between inflation and economic growth is nonlinear. The study involves D8 countries over the period of 1994 through 2015. Panel Smooth Transition Regression (PSTR) model is employed to estimate the threshold of inflation and its effects on economic growth. The study finds that there exists a statistically significant negative relationship between inflation and growth for the inflation rates above the threshold level of 3.3%, above which inflation starts impeding economic growth in D8 countries. The results indicate that there are two transition functions, each of which has an inflation threshold. In addition, in this study, the elasticity of economic growth was calculated for these countries.