Endogenous monetary approach to optimal inflation-growth nexus in Swaziland

Phiri, Andrew (2018): Endogenous monetary approach to optimal inflation-growth nexus in Swaziland.

Abstract

With the inflation-growth nexus being a hotly debated issue within the academic paradigm, the purpose of our study is to examine the relationship for Swaziland between 1975 and 2016 of which there currently exists very limited country-specific evidence. In the design of our study we theoretically depend on an endogenous monetary model of economic growth augmented with a credit technology which causes a nonlinear relationship between inflation and growth. Econometrically, we rely on the smooth transition regression (STR) which allows us to estimate an optimal inflation rate characterized by smooth transition between different inflation regimes. Our empirical results point to an inflation threshold estimate of 7.64% at which economic growth gains are maximized or similarly growth losses are minimized. In particular, we find that above the inflation threshold economic agents may be able to protect themselves from inflation through credit technology and a more urbanized population yet such high inflation adversely affects the influence of exports on economic growth. This noteworthy since a majority of government revenues is from trade activity via the country’s affiliation with the Southern African Customs Union (SACU). Nevertheless, the major contribution of this paper is that it becomes the first to use endogenous growth theory to estimate the inflation threshold for any African country which will hopefully pave a way for similar studies on other African countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation; Economic growth; Endogenous monetary growth model; Smooth transition regression; Swaziland; African country
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

References

Adusei M. (2012), “The inflation-growth nexus: Estimating the threshold effect for South Africa”, Journal of Money, Investment and Banking, 26, 87-93.

Barro R. (1995), “Inflation and growth”, NBER Working Paper No. 5326, October.

Bruno and Easterly (1998), Inflation crisis and long-run growth”, Journal of Monetary Economics, 41(1), 3-26.

Cooley T. and Hansen G. (1989), “The inflation tax in a real business cycle model”, American Economics Review, 79(4), 733-748.

De Gregorio J. (1992), “The effect of inflation on economic growth”, European Economic Review, 36 (2-3), 417-425.

De Gregorio J. (1993), “Inflation, taxation, and long-run growth”, Journal of Monetary Economics, 31(3), 271-298.

Eitrheim O. and Terasvirta T. (1996), “Testing the adequacy of smooth transition autoregressive models”, Journal of Econometrics, 74, 59-76.

Epstein G. (2008), “An employment targeting framework for central bank policy in South Africa”, International Review of Applied Economics, 22(2), 243-258.

Fabayo J. and Ajilore O. (2006), “Inflation: How much is too much for economic growth in Nigeria”, Indian Economic Review, 41(2), 129-147.

Fisher S. (1993), “The role of macroeconomic factors in growth”, The Journal of Monetary Economics, 32(3), 485-512.

Frimpong J. and Oteng-Abayie E. (2010), “When is inflation harmful? Estimating the threshold effect for Ghana”, American Journal of Economics and Business Administration, 2(3), 232-239.

Ghosh and Phillips (1998), “Warning: Inflation may be harmful to your growth”, IMF Staff Papers, 45(4), 672-710.

Gillman M., Harris M. and Matyas L. (2004), “Inflation and growth: Explaining a negative effect”, Empirical Economics, 29(1), 149-167.

Gillman M. and Heyak M. (2005), “Inflation and balanced-path growth with alternative payment mechanisms”, The Economic Journal, 155(500), 247-270.

Gomme P. (1993), “Money and growth revisited: Measuring the costs of inflation in an endogenous growth model”, Journal of Monetary Economics, 32(1), 51-77.

Greenwood J. and Huffman G. (1987), “A dynamic equilibrium model of inflation and unemployment”, Journal of Monetary Economics, 19(2), 203-228.

Hansen B. (1999), “Threshold effects in non-dynamics panels: Estimating, testing, and inference”, Journal of Econometrics, 93(2), 345-368.

Hasanov M., Arac A. and Telatar F. (2010), “Nonlinearity and structural stability in the Phillips curve: Evidence from Turkey”, Economic Modelling, 27, 1103-1115

Kahn M. and Senhadji A. (2001), “Threshold effects in the relationship between inflation and growth”, IMF Staff Papers, 48(1), 1-21.

Kremer S., Bick A. and Nautz D. (2013), “Inflation and growth: New evidence from a dynamic panel threshold analysis”, Empirical Economics, 44(2), 861-878.

Lucas R. (1980), “Equilibrium in a pure currency economy”, Economic Inquiry, 18(2), 203-220.

Lucas R. and Stokey N. (1987), “Money and interest in a cash-in-advance economy”, Econometrica, 55(3), 491-513.

Lundbergh S., Terasvirta T. and van Dijk D. (2003), “Testing linearity against smooth transition autoregressive models”, Biometrika, 75(3), 491-499.

Luukkonen R., Terasvirta S. and van Djik D. (1998), “Testing linearity against smooth transition autoregressive models”, Biometrika, 75, 491-499.

Mkhatshwa Z., Tijani A. and Masuku M.(2015), “Analysis of the relationship between inflation, economic growth and agricultural growth in Swaziland from 1980-2013”, Journal of Economics and Sustainable Development, 6(18), 189-204.

Ndoricimpa A. (2017), “Threshold effects of inflation on economic growth: Is African different?”, International Economic Journal, 31(4), 599-620.

Nguyen H. and Nguyen L. (2018), “The relationship between urbanization and economic growth: An empirical study on ASEAN countries”, International Journal of Social Economics, 45(2), 316-339.

Nkume J. and Ngalawa H. (2014), “Optimal inflation threshold for economic growth in Malawi”, Journal of Economics and Behavioural Studies, 6(12), 933-946.

Omay T., van Eyden R. and Gupta R. (2018), “Inflation-growth nexus: Evidence from a pooled CCE multiple regime panel smooth transition model”, Empirical Economics, 54, 913-944.

Phetwe M. and Molefe L. (2016), “Inflation and economic growth: Estimation of a threshold level of inflation in Botswana”, Bank of Botswana Research Bulletin, 29(1), 12-23.

Phiri A. (2010), “At what level is inflation detrimental towards finance-growth activity in South Africa?”, Journal of Sustainable Development in Africa, 12(6), 12-23.

Phiri A. (2013), “Inflation and economic growth in Zambia: A threshold autoregressive (TAR) econometric approach”, The Bank of Zambia Reader, 1(8), 100-104.

Phiri A. (2018), “Nonlinear impact of inflation on economic growth in South Africa: A smooth transition regression analysis”, International Journal of Sustainable Economy, 10(1), 1-17.

Sarel M. (1996), “Nonlinear effects of inflation on economic growth”, IMF Staff Papers, 43(1), 199-215.

Seleteng M., Bittencourt M. and van Eyden R. (2013), “Non-linearities in the inflation-growth nexus in the SADC region: A penal smooth transition regression approach”, Economic Modelling, 30(C), 149-156.

Sidrauski M. (1967), “Rational choice and patterns of economic growth in a monetary economy”, American Economic Review, 57(2), 534-544.

Stockman A. (1981), “Anticipated inflation and the capital stock in a cash-in-advance economy”, Journal of Monetary Economics, 8(3), 387-393.

Terasvirta T. (1994), “Specification, estimation and evaluation of smooth transition autoregressive models”, Journal of American Statistical Association”, 89, 208-218.

Tobin J. (1965), “Money and economic growth”, Econometrica, 33(4), 671-684.

Yabu N. and Kessy N. (2015), “Appropriate threshold level of inflation for economic growth: Evidence from the three founding EAC countries”, Applied Economics and Finance, 2(3), 127-144.