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Investigating Non-Linearities in the Inflation-Growth Trade-off in Transition Countries

This study examines the existence of non-linear relationships between inflation and economic growth in transition countries. Using a static and dynamic panel model, the analysis explores the placement of the threshold inflation level and its impact on growth. Empirical evidence suggests that the threshold is estimated to be at 1-3% for industrial countries and 7-11% for developing countries. The study includes a sample of 8 transition countries and covers a period of 13 years (1991-2003).

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Investigating Non-Linearities in the Inflation-Growth Trade-off in Transition Countries

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  1. Investigating non-linearities in the inflation-growth trade-off in transition countries Lena Malesevic Teaching assistant at the Faculty of Economics Split, Croatia PhD student at Staffordshire University, UK Dubrovnik, 27.6.2007

  2. Theory • Akerlof et al. (2000) • Palley (2003) • Impact on growth Empirical work • Khan and Senhadji (2000)- the threshold is estimated to be at 1-3 percent for industrial countries and 7-11 percent for developing countries.

  3. The model(s) Our sample consists of 8 transition countries (Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia) and 13 years (1991-2003), i.e. 104 observations per each variable. (1) (2) (3) (4)

  4. *, ** and *** denote 1, 5 and 10 percent level of significance, respectively. Robust standard errors were used and year dummies included.

  5. (3) The coefficient (2) on the dummy variable, without year dummies, static panel *, ** and *** denote 1, 5 and 10 percent level of significance, respectively. Robust standard errors were used and year dummies included. The coefficient (2) on the dummy variable, without year dummies, dynamic panel

  6. R2 for different values of threshold inflation (*), without year dummies, static panel (4)

  7. Wald (chi2) for different values of threshold inflation (*), without year dummies, dynamic panel

  8. Conclusion • Static vs. dynamic model; • Non-linearities; • Placement of the kink?

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