Inflation - Growth Nexus: A Dynamic Panel Threshold Analysis for East African Economies

Abstract

This paper aims to investigate the role of inflation on economic growth in East African Countries. Panel data over a period of about 26 years starting from 1990 to 2016 was used for six East African countries.  A dynamic panel threshold model (DPTM) is introduced to estimate inflation thresholds for long-term economic growth and to test the existence of non-linear relationship between economic growth and inflation. The model allows the estimation of threshold effects with panel data that the existence of Endogeneit is taken into considerations. The estimated results confirm the existence of inflation threshold picking the threshold level to be 10.48 percent.  The result confirms that inflation rates exceeding the threshold level (10.48%) are associated with lower economic growth. However, below this threshold, the correlations between the two variables remain insignificant. Since pushing the inflation rate down is always done at the expense of unemployment, government should make sure that they identified the right inflation rate to be achieved.

Keywords: Economic growth, Dynamic panel threshold model, inflation, East African Countries, Generalized Method of Moment