We introduce a dynamic panel threshold model to shed new light on the impact of inflation on long-term economic growth. The empirical analysis is based on a large panel-data set including 124 countries during the period from 1950 to 2004. For industrialized countries, our results confirm the inflation targets of about 2% set by many central banks. For non-industrialized countries, we estimate that inflation hampers growth if it exceeds 17%. Below this threshold, however, the impact of inflation on growth remains insignificant. Therefore, our results do not support growth-enhancing effects of inflation in developing countries.
Inflation thresholds inflation and growth dynamic panel threshold model