Nonlinearity Relationship of Inflation and Economic Growth: Role of Institutions Quality

The inflation-growth nexus has drawn much interest in the modern contemporary economic literature, both theoretically and empirically across countries. A trade-off in this relationship was revealed to be crucial and the notion of an inflation threshold would be of great importance for the economic agents. The aim of this study, therefore, was to estimate an inflation threshold and examine its impact on the inflation - growth relationship in the North African countries during the period 1980–2016. This relationship was investigated by applying the Dynamic Panel Threshold Regression, taking into account some institutional variables, to capture the level of democracy and political instability. In line with several previous research works, our findings indicated that there is a nonlinear relationship between Consumer Price Index (CPI) inflation and the economic growth rate. They also showed that the CPI inflation, above a certain threshold, has a negative influence on economic growth, but has no effect below this level. In addition, these results proved that the cost of inflation increases with the quality of institutions; i.e., the effect of political instability and the level of democracy.