Inflation Threshold and Economic Growth: Evidence from West Africa Monetary Zone (WAMZ) Countries

Sustainable inflation rate is one of the most challenging macroeconomic objectives capable of fostering every pragmatic effort at achieving other macroeconomics goals if curtailed. In view of the above, the paper empirically examines the threshold inflation rate that is considered optimally reasonable for maintaining a sustainable economic growth. The study in specific terms employs a least square multivariate approach to estimate a threshold level of inflation. Furthermore, error correction modeling (ECM) approach was explored to identify the long run relationship among other major determinants of real GDP growth using a simple augmented production function. In addition, a pairwise granger causality test was conducted to explore the causal link between the inflation threshold and growth of real GDP. Interestingly, it was observed from the causality test that there was neither bidirectional nor unidirectional causality between the two but rather an independent relationship. The findings from least square estimation also established 10% threshold inflation level. The results from ECM confirmed the values of lagged of real GDP growth rates, investment, current inflation, population growth and terms of trade as important factors affecting growth rates of real GDP of the West Africa Monetary Zone(WAMZ) countries. Based on the outcome of the results it was therefore suggested that an identification of regional inflation thresholds in the inflation-growth relationship might provide useful information about the appropriate location and width of an inflation targeting band.