Estimation of an optimal inflation rate for economic growth in ECOWAS: A proposal for revision of the inflation target
DOI:
https://doi.org/10.18559/rielf.2024.2.1925Keywords:
inflation target, economic growth, PTR model, ECOWASAbstract
Purpose: The aim of this paper is to determine an optimal inflation rate and study its impact on the inflation-growth relationship in ECOWAS.
Design/methodology/approach: We use the econometric modelling technique “Panel Threshold Regression (PTR)” developed by Hansen (1999), applied to data from ECOWAS countries covering the period 1980–2018.
Findings: The results confirm the existence of a non-linear relationship between inflation and economic growth. Two inflation thresholds emerge: the first at 6.6% is robust to sensitivity analysis, and the second at 34.1%. Thus, the effect of inflation on growth would be positive for inflation rates below 6.6%, negative at levels above 34.1%, and insignificant within this range. The effect of inflation on growth proved to be very weak in all plans.
Originality/value: This paper is in line with recent empirical work attempting to determine an optimal inflation target for the definition and implementation of monetary policies in the ECOWAS region. These results show that the current 5% inflation norm, adopted within the framework of the ECOWAS Monetary Cooperation Program, could be revised upwards, towards a level close to 6.6%.
JEL Classification
Panel Data Models • Spatio-temporal Models (C23)
Price Level • Inflation • Deflation (E31)
Macroeconomic Issues of Monetary Unions (F45)
General (O40)
Africa (O55)
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