Threshold Effects on the Relationship Between Inflation Rate and Economic Growth in Tunisia

ABSTRACT

Using an econometric technique suggested by Hansen [(2001). The new econometrics of structural change: Dating breaks in U.S. Labor productivity. Journal of Economic Perspectives, 15, 117–128], this paper studies the inflation–economic growth nexus in the case of Tunisia for the 1993-01–2012-11 period. The results show that there is one inflation threshold value that does exist for Tunisia. This evidence strongly sustains the view that the relationship between inflation rate and economic growth is non-linear. The estimated threshold regression model suggests that a threshold value of inflation rate below 3.48% fosters economic growth. In addition, above this threshold level, there is a statistically significant negative relationship between inflation rate and economic growth. These results have important implications to policy-makers who should pay attention to the inflation phenomena. Therefore, a new policy that takes into account such a threshold should be set up.

KEYWORDS:

• Threshold regression model
• inflation rate
• economic growth
• threshold level
• Tunisia

Acknowledgements

We would like to thank the Tunisian Ministry of Higher Education for providing facilities to make this research possible. We would also like to thank Mr Abdelmajid Dammak for his help with the English and the proofreading of this paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Thouraya Boujelbène Dammak is a Tunisian researcher specialised in macroeconomics and monetary economics. She is an assistant professor in Economic at Higher Institute of Business Administration of Sfax, University of Sfax. She is a member at a Research Unit in Applied Economics in Sfax, Tunisia. She is the author of several papers in the field of macroeconomics and monetary economics. She is also a reviewer for some international journals.

Kamel Helali is a Tunisian researcher. He is an associate professor in Applied Quantitative Method at Faculty of Economics and Management of Sfax, University of Sfax. He is a member at CODECI: (Competitiveness, commercial decision and internationalization). He is the author of several papers in the field of micro- and macroeconomics, market finance and firm finance.

Notes

1 Vazquez (2002) examined the nature of the relationship between output and inflation in 15 countries of the European Union and the United States. The author uses the VAR method to estimate their model. The general level of prices is reflected by the CPI. The production is reflected by the index of industrial production. The empirical analysis suggests that the relationship is positive and significant in countries which inflation is low.

2 Lack of monthly data, we utilise the IPI instead of GDP.