Threshold Eects in the Relationship Between Ination and Growth: A New Panel-Data Approach

Abstract

In this paper we use a new approach to throw light on the old question of the super-neutrality of money. Recent theoretical results suggest a threshold model instead of super-neutrality. To ascertain whether or not there is a threshold level of ination above which the eect of ination on long-run growth changes, we apply new econometric methods for estimation and inference in non-dynamic, xed-eects, panel-data models that may contain threshold eects. In the full sample of 138 countries over the period 1950{2000, we nd that there is one threshold that is well identied by the data; the estimated value of the threshold is 19.16%. For the industrialized sample, our results indicate that there are two threshold points at 2.57% and 12.61%. In the full sample, if the initial ination rate is below 19.16%, increases in ination do not have a statistically signican t eect on growth. In contrast, when the initial ination is above 19.16%, further increases in ination will decrease long-run growth.

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