Non-Linearity between Inflation and Economic Growth in Emerging Economies: A Threshold Regression Approach

Abstract Purpose This study examines the threshold effect of inflation on economic growth for 14 EMEs (Emerging Market Economies) from 1990 to 2022 using both panel and time series data. Design/methodology/approach We used Hansen’s (1999; 2000) endogenous TAR method to estimate country-specific inflation thresholds for 14 EMEs and applied panel threshold regression to determine the collective inflation threshold for these economies. Findings Our findings suggest that inflation rates below 9.9977% benefit economic growth, while rates above this threshold are harmful. Time series analyses for the 14 EMEs consistently indicate a single threshold, with an average threshold rate of 6.79%. This closely aligns with the literature’s average of 6%, supporting our results’ robustness. Originality Our study differs from the earlier studies in four ways. Firstly, this study estimates the threshold impact of inflation with respect to economic growth in case of 14 EMEs as no such study has been done yet for these countries. Secondly, we have employed the latest TAR model suggested Hansen (1999, 2000) for empirical estimation of time series and panel threshold model for panel data respectively. Thirdly, we have used a large pool of data for the period of 1990-2022. Fourth, we have empirically determined the panel threshold inflation rate for 14 emerging market economies and also the country-specific threshold inflation rates for each of these nations individually.