UNIVERSITY OF ECONOMICS HCMC

VIETNAM NETHERLANDS PROGRAMME

FOR M.A IN DEVELOPMENT ECONOMICS

TERM PROJECT ASSIGNMENT

ECONOMETRICS

Threshold Effects in the Relationship between

Inflation and Growth in OECD Countries

Instructors :
Co-Instructors:

Students

: Phm Th Hin
Phm Nguyn Qung Ho
Nguyn Phng Thu
Nguyn Duy Anh
Nguyn Thnh
Lng Cng Hong

Class 21
Ho Chi Minh City
03 - 2015

1.1 Title:
This paper investigates the issue of existence of threshold effects in relationship between inflation and growth of OECD countries
in 1970-2013 periods. Inflation threshold level is estimated by a non-linear least square technique and enhanced by using bootstrap
method
1.2 Literature review:
N

Authors

Papers

Methodology

Data

Results

The role of
macroeconomic
factors in growth

This study inherited and

extended model which
came from Fischer
(1991). Beside,
developing alternative
approach due to Victor
Elias (1992)- a
regression analog of
growth accounting- to
explore non linearity in
the relationship between
inflation and growth

Study used data of many

countries around the world:
AFRICA, ASIA, EASIA,
LACAR, OECD, and SASIA,
which collected from several
sources such as World Bank,
International Financial
Statistics And, variables
included: real GDP, growth of
the capital stock, labor force,
product of LABOR, inflation
rate, black market exchange rate
premium

This study concluded that

inflation stimulates economic
growth when it is below a
threshold value, but affects
negatively if it is above that
threshold level

Using co-integration and

error correction model to
analyze and found a long
run relationship between
inflation and economic

Data collected from four south

Asian countries (Bangladesh,
India, Pakistan and Sir lank)

There is the positive

relationship between inflation
and economic growth. And
the sensitivity of inflation to

Stanley
Fischer
(1993)

Mallik and Inflation and

Chowdhury Economic
(2001)
Growth: Evidence
from South Asian
Countries

growth

changes
in growth rates is larger than
that of growth to changes in
inflation rates

Mohsin S.
Khan
and
Abdelhak S.
Senhadji
(2000)

Threshold Effects
In the
Relationship
Between Inflation
And Growth

This paper used new

techniques which
developed by Bruce
Hansen (1999,2000),
which provide
appropriate procedures
for estimation and
inference ( section III,
p6- Stephanie Kremer
2009)

Data included 140 countries

( industrial and developing
countries in 1960-1980 which
came primarily World Economic
Outlook included:
-

The growth rate of GDP in

local currency in constant
1987 prices

Inflation measures as the

growth rate of CPI index

Gross domestic investment

as a share of GDP

Population growth

The growth rate of term of

trade

The threshold level of

inflation for industrial
countries is 1-3% and 7-11%
for developing countries.
The results suggest negative
effect of inflation on growth
when inflation rate above this
threshold level. On the
contrary, below this point,
inflation rate is conducive to
improved growth
performance

1.3 Model:
e t+ 1=k 0 +k 1 e t +u1 t +1

SP /P
e=ln

No.
1
2
3
4

Variables
e

k0 , k1
u1 t +1

Definition and description

Log of real exchange rate
Intercept
Error terms
the log of the spot exchange rate
defined in local currency units per
foreign currency unit
log of the price levels in home
country
log of the price levels in foreign
country

Regression Methods: Using GLS instead of OLS ( because OLS leads to bias in estimation)
1.4 Data

- Data includes OECD countries and generally covers the period of 1980-2013, which
collected primarily in International Monetary Fund's International Financial Statistics

References
1. Adler, Michael and Bruce Lehmann, 1983, Deviations from purchasing power parity in the long run, Journal of Finance 38,
1471-1487.
2. Abuaf, N., & Jorion, P. (1990). Purchasing power parity in the long run. The Journal of Finance, 45(1), 157-174.

3. Hakkio, Craig S., 1984, A re-examination of purchasing power parity: A multi-country and multiperiod
study, Journal of International Economics 2, 265-278.
4. Kendall, M. G., 1973, Time-Series (Griffin, London).
5. Dickey, David A. and A. Wayne Fuller, 1979, Distribution of estimators for autoregressive time series
with a unit root, Journal of American Statistical Association 74, 427-431.