UNIVERSITY OF ECONOMICS HCMC

VIETNAM – NETHERLANDS PROGRAMME

FOR M.A IN DEVELOPMENT ECONOMICS

TERM PROJECT ASSIGNMENTECONOMETRICS

Threshold Effects in the Relationship between Inflation and Growth in OECD Countries

Instructors :

Co-Instructors:

Students : Phạm Thị HiềnPhạm Nguyễn Quảng HoàNguyễn Phương ThuýNguyễn Duy AnhNguyễn Thành ĐôLương Công Hoàng

Class 21Ho 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

1 Stanley Fischer (1993)

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

2 Mallik and Chowdhury (2001)

Inflation and Economic Growth: Evidence from South Asian

Using co-integration and error correction model to analyze and found a long run relationship between

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

Countries inflation and economic growth

changes

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

3 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+k1 et+u1 t+1

e=ln¿)

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

References1. 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.

No. Variables Definition and description1 e Log of real exchange rate2 k 0 , k1 Intercept3 u1 t+1 Error terms4 S the log of the spot exchange rate defined

in local currency units per foreign currency unit

5 P log of the price levels in home country6 P¿ log of the price levels in foreign country

3. Hakkio, Craig S., 1984, A re-examination of purchasing power parity: A multi-country and multiperiodstudy, 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 serieswith a unit root, Journal of American Statistical Association 74, 427-431.