Re-examining the threshold effects in the inflation–growth nexus with cross-sectionally dependent non-linear panel: Evidence from six industrialized economies

This paper analyzes the empirical relationship between inflation and output growth using a novel panel data estimation technique, Panel Smooth Transition Regression (PSTR) model, which takes account of the non-linearities in the data. By using a panel data set for 6 industrialized countries that enable us to control for unobserved heterogeneity at both country and time levels, we find that there exists a statistically significant negative relationship between inflation and growth for the inflation rates above the critical threshold level of 2.52%, which is endogenously determined. Furthermore, we also control cross-section dependency by using the CD test modified to non-linear context and remedy cross-section dependency with Seemingly Unrelated Regression Equations through Generalized Least Squares (SURE-GLS) and newly proposed Common Correlated Effects (CCE) estimation techniques. We find that these methods change the critical threshold value slightly. The estimated threshold values from these estimation methods are 3.18% and 2.42%, respectively.     

Reexamining the relationship between inflation and growth: Do institutions matter in developing countries?

Using a large panel of countries during the period 1950–2009, we estimate the inflation thresholds above which its association with economic growth is expected to be negative, taking into account differences in institutions across countries. First, in line with previous literature, we find that the estimated threshold is substantially higher for developing countries compared to that of developed countries. However, we further show that the inflation threshold in developing economies falls when we consider reduced groups that exceed certain levels of institutional quality. We also find that the cost of inflation increases with the quality of institutions.     

Non-linearities in inflation–growth nexus in the SADC region: A panel smooth transition regression approach

The main objective of central banks around the world is the achievement and maintenance of price stability, which actually creates an environment conducive for faster economic growth. Therefore, it is important for policy makers to understand the relationship between inflation and economic growth in order to make sound policies. If inflation is detrimental to economic growth, then policy makers should aim for low rates of inflation. This leads to a question; how low should the inflation rate be? Previous research in the non-linearities of the inflation–growth relationship has found that a positive relationship exists when the inflation rate is low and a negative relationship when the inflation rate is high. This implies the existence of a threshold level of inflation at which the sign switches. In this paper we use panel data for the period 1980–2008 to examine the inflation–growth nexus in the Southern African Development Community (SADC) region and to endogenously determine the threshold level of inflation. To deal with problems of endogeneity and heterogeneity, the paper uses the Panel Smooth Transition Regression (PSTR) method developed by González et al. (2005) to examine the non-linearities in the inflation–growth nexus. This technique further estimates the smoothness of the transition from a low inflation to a high inflation regime. The findings reveal a threshold level of 18.9%, above which inflation is detrimental to economic growth in the SADC region.     

What matters in the finance–growth nexus of advanced economies? Evidence from OECD countries

Over the last decades, a large strand of finance and growth literature has provided ample evidence on the importance of financial deepening for economic development. Yet, recently, the focus of public debate has shifted towards the role of the financial system structure, an area in which empirical research remains relatively sparse and exploratory in nature. With this article, we aim to contribute to that debate by analysing the role the financial system structure plays in economic growth and risk. Focusing on stock markets and studying OECD economies over 1994–2013, we find that, ceteris paribus, financial systems with relatively larger stock markets facilitate economic growth and dampen economic risk. Our findings remain robust under application of instrumental variable and system generalized method of moments estimators, as well as when we use an alternative definition of stock market development, estimate median regressions, examine relatively high-frequency annual data, control for systemic banking crises or apply quadratic specifications. We find no such effect for private bond markets or private credit volume. Overall, our results suggest that financial system structure matters for the economic development of advanced economies and highlight the importance of a debate about the optimal structure of an economy’s financial system.     

Urban–rural income polarization and economic growth in China: evidence from the analysis of a dynamic panel data model

Using a dynamic panel data model and the system GMM, this article examines the relationship between urban–rural income polarization and economic growth at the provincial level in the period 1995 to 2010 in China. The estimated results and significant tests indicate that a certain degree of urban–rural income polarization is beneficial to economic growth at the provincial level in both stages for China as a whole, though the contribution of urban–rural income polarization to economic growth is relatively small. Aggravating urban–rural income polarization has a negative impact on economic growth in China. Based on a cluster analysis of regional economic growth at the provincial level, the authors carried out the same analysis separately for two categories of regions too. The results for those two categories of regions show that positive correlations also exist between urban–rural income polarization and economic growth in both stages, which are very similar to the analysis for the whole of China. In addition, a meaningful finding can be derived that the contribution of consumption growth rate to economic growth rate in the second stage is smaller than that in the first stage obviously.     

Evidence on inflation–output trade-off in developing and industrial countries

This paper subjects Lucas's output–inflation trade-off study to further empirical investigation. The cross-country study divides the 111 countries covered into 90 developing countries and 21 advanced countries. Lucas's proposition is that volatility of aggregate demand growth should reduce the impact of aggregate demand growth on the cyclical output and the implication of this is that there is no output–inflation trade-off in line with the natural rate theory. We employ annual data over periods that fall between 1958 and 1985 in order to conduct the test. Our findings suggest that Lucas's proposition is valid for developed economies but not for developing economies.     

Do oil consumption and economic growth intensify environmental degradation? Evidence from developing economies

The purpose of this article is to empirically investigate the impact of economic growth, oil consumption, financial development, industrialization and trade openness on carbon dioxide (CO₂) emissions, particularly in relation to major oil-consuming developing economies. This study utilizes annual data from 1980 to 2012 on a panel of 18 developing countries. Our empirical analysis employs robust panel cointegration tests and a vector error correction model (VECM) framework. The empirical results of three panel cointegration models suggest that there is a significant long-run equilibrium relationship among economic growth, oil consumption, financial development, industrialization, trade openness and CO₂ emissions. Similarly, results from VECMs show that economic growth, oil consumption and industrialization have a short-run dynamic bidirectional feedback relationship with CO₂ emissions. Long-run (error-correction term) bidirectional causalities are found among CO₂ emissions, economic growth, oil consumption, financial development and trade openness. Our results confirm that economic growth and oil consumption have a significant impact on the CO₂ emissions in developing economies. Hence, the findings of this study have important policy implications for mitigating CO₂ emissions and offering sustainable economic development.     

Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

The relationship between population growth and standard-of-living growth over 1870–2013: evidence from a bootstrapped panel Granger causality test

This paper examines the linkages between population growth and standard-of-living growth in 21 countries over the period of 1870–2013. We apply the bootstrap panel causality test proposed by Kónya (Econ Model 23:978–992, 2006), which accounts for both dependency and heterogeneity across countries. We find one-way Granger causality running from population growth to standard-of-living growth for Finland, France, Portugal, and Sweden, one-way Granger causality running from standard-of-living growth to population growth for Canada, Germany, Japan, Norway and Switzerland, two-way causality for Austria and Italy, and no causal relationship for Belgium, Brazil, Denmark, Netherlands, New Zealand, Spain, Sri Lanka, the UK, the USA, and Uruguay. Dividing the sample into two subsamples due to a structural break yields different results over the two periods of 1871–1951 and 1952–2013. Our empirical results suggest important policy implications for these 21 countries as the directions of causality differ across countries and time period.     

Is the natural resource production a blessing or curse for China's urbanization? Evidence from a space–time panel data model

This paper provides an analytical framework to evaluate under what conditions the natural resource production could promote or hinder urbanization process, focusing on factors mostly relevant for China. Considering both structure breaks and cross-sectional dependence as well as spatial spillovers, the study deploys a comprehensive approach to rigorously prove the validity of the proposed space–time panel data model that includes the second generation panel unit root test and panel cointegration, panel threshold regression and spatial panel Durbin model. The results not only offer strong evidences that the natural resource production non-linearly impacts on urbanization process, but also show that there exists a dynamic response over time and space as well as space–time diffusion impact, in which these percentages are different from each other confirming an asymmetric effect of the natural resource production on urbanization process.     

Tourism–growth nexus in Pakistan: Evidence from ARDL bounds tests

This study is an attempt to test the long run relationship between international tourism and economic growth of Pakistan by using Autoregressive Distributed Lag (ARDL) models over the period of 1972 to 2011. The initial results show that the causality runs from tourism to economic growth. Furthermore, the estimated growth regression clearly indicates that the international tourism has a significantly positive impact on the economic growth of Pakistan along with other variables like physical capital and international trade. This implies that the improvement in the tourism sector may enhance the economic growth activities in Pakistan.     

Do long-term interest rates drive GDP and inflation in small open economies? Evidence from Poland

This article investigates the impact of long-term interest rates on macroeconomic variables in a small open economy. It shows that the time-varying term premium stabilizes GDP without affecting significantly inflation volatility in Poland – a typical open economy with flexible exchange rate. This conclusion is drawn from an estimated dynamic stochastic general equilibrium model in which segmented asset markets and imperfect asset substitutability give rise to the time-varying term premium in the long-term interest rate. Furthermore, the impulse response analysis of the model reveals that the term premium stabilizes GDP when the small economy is hit by shocks that are absent in closed economy models (country risk premium and export preference) which points to the different impact of the term premium on relatively close (large) and open (small) economies.     

Does paternity leave matter for female employment in developing economies? Evidence from firm-level data

Analysis using firm-level data for a sample of 33,302 firms in 53 developing countries shows that women’s employment among private firms is significantly higher in countries that mandate paternity leave versus those that do not. A conservative estimate suggests an increase of 6.8 percentage points in the proportion of women workers associated with mandating paternity leave. The empirical specification is immune to spurious correlations that affect the level of women and men employment equally and also robust to a large number of controls for country and firm characteristics.     

Cyclical growth in a Goodwin–Kalecki–Marx model

This paper presents a disequilibrium macrodynamic model that incorporates certain elements from Goodwin (the dynamics of the rate of employment and income distribution), Kalecki (an investment function independent of savings, and mark-up pricing in oligopolistic goods markets), and Marx (the reserve-army and reserve-army-creation effects). The model has a system of differential equations for the rate of utilization, profit share, and rate of employment. We show that there exist limit cycles that depend on the sizes of the reserve-army effect and reserve-army-creation effect. This implies that there exists a situation in which the economy experiences endogenous and perpetual growth cycles. Moreover, we show that if the stable long-run equilibrium corresponds to the profit-led growth regime, an increase in the bargaining power of workers increases the rate of unemployment; conversely, if the equilibrium corresponds to the wage-led growth-regime, an increase in the bargaining power of workers decreases the rate of unemployment.     

Can monetary policy stabilise food inflation? Evidence from advanced and emerging economies

This paper addresses a long-standing political debate as how effective is monetary policy to stabilise food inflation. While a wealth of theoretical literature suggests a stabilising role of monetary policy via aggregate demand channel, there exists hardly any empirical consensus on this issue. Very recently, a limited strand of empirical literature has attempted to shed light in this arena. The present study contributes to this literature by analysing the effectiveness of aggregate demand channel in presence of production cost channel of monetary policy transmission, affecting prices positively via supply side, in a panel of developed and emerging economies for the period 2006 Q1 to 2016 Q2. We find that an unexpected monetary tightening has a positive and significant effect on food inflation in both advanced and emerging economies. Our findings suggest that in the backdrop of inflationary pressure stemming from the food sector, a monetary tightening may turn out to be destabilising for the food as well as overall inflation in the economy.     

Are shocks to foreign investment in developing countries permanent or temporary? : Evidence from panel unit root tests

We examine the time path of foreign direct and portfolio investment in developing countries to test if shocks have permanent or temporary effects. Our findings indicate that shock effects are temporary. The results are robust to the strictness of balance of payment controls.     

Does inflation targeting make a difference in developing countries?

We evaluate the treatment effect of inflation targeting in thirteen developing countries that have adopted this policy by the end of 2004. Using a variety of propensity score matching methods, we show that, on average, inflation targeting has large and significant effects on lowering both inflation and inflation variability in these thirteen countries. However, the effectiveness of inflation targeting on lowering inflation is found to be quite heterogeneous. The performance of a given inflation targeting regime can be affected by country characteristics such as government's fiscal position, central bank's desire to limit the movements of exchange rate, its willingness to meet the preconditions of policy adoption, and the time length since the policy adoption.     

Should a central bank react to food inflation? Evidence from an estimated model for Chile

We examine whether food price shocks are a major source of macroeconomic fluctuations. We estimate a small open economy DSGE model using an alternative Taylor rule applied to Chilean data. The empirical evidence suggests that food inflation played a non-trivial role in shaping Chile's de facto monetary policy actions. Consistent with its commitment to price stability, the central bank increases the policy rate in reaction to food inflation. Despite an immediate monetary policy reaction to a food price shock, the policy rate gradually tapers off. This is due to a second-round effect on non-food inflation propagated by the food price shock. A main finding is that monetary policy that targets headline inflation is welfare improving.     

Does reference point matter in the leverage–return relationship? Evidence from the US stock market

The leverage–return relationship is supported by inconclusive empirical evidence in terms of its sign and significance. In this study, we argue that such a puzzling relationship can be understood by extending the traditional theoretical framework in a way that captures the reference dependence characteristics of prospect theory. We postulate that a firm’s leverage position relative to its reference point (i.e. target leverage) combined with market conditions places firms in either a gain or a loss domain, thereby resulting in different leverage–return relationships. Leverage and expected equity returns generally exhibit positive and negative relationships in gain and loss domains, respectively. Three hypotheses are derived and tested using 1998–2013 empirical data from the US stock market. This article contributes to the existing literature by confirming the applicability of prospect theory in explaining expected returns in the stock market.