Skip to main content

Advertisement

SpringerLink
Log in

Inflation and Economic Growth in Sub-Saharan Africa: The Role of Institutions

  • Original Article
  • Published:
Journal of Quantitative Economics Aims and scope Submit manuscript

Abstract

The objective of this paper is to revisit the non-linearity of the inflation-growth relationship in Sub-Saharan Africa, with a focus on the role of institutional quality apprehended by the level of democracy. Empirically, we used the Panel Smooth Transition Regression (PSTR) model to estimate the optimal inflation threshold from which the inflation-growth relationship changes sign. In a rather particular way, we appreciate the sensitivity of the estimation of the optimal threshold according to three modalities of the political regime, namely the democratic regime, the anocratic regime and the authoritarian regime. Over the period 2002–2015, we arrive at the following main findings: 1. the inflation-growth non-linearity is validated, attesting to a single inflation threshold or two inflation regimes; 2. the optimal inflation threshold is estimated at 12.23% in Sub-Saharan Africa. In other words, the inflation-growth relationship is positive (negative) for any level of inflation below (above) this threshold; 3. the mediating effect of institutions, captured by the quality of the political regime, is significant in explaining the nonlinear inflation-growth relationship in Sub-Saharan Africa. This result also shows that the weight of the mediating effect of the political regime is greater in authoritarian regimes. Based on these results, a set of policies is advised.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Source: Authors

Fig. 2

Source: Authors from WDI data

Similar content being viewed by others

Data availability

Data are available on request.

Notes

  1. South Africa, Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Central African Republic, Côte d'Ivoire, Gabon, The Gambia, Ghana, Guinea Bissau, Congo Rep., Mauritius, Kenya, Liberia, Madagascar, Malawi, Mali, Mauritania, Namibia, Niger, Nigeria, Uganda, DR Congo, Rwanda, Senegal, Sudan, Tanzania, Chad, Togo.

References

  • Acemoglu, D., and J.A. Robinson. 2012. Why nations fail: The origins of power, prosperity and poverty. London: Profile.

    Google Scholar 

  • Acemoglu, D., S. Johnson, and J.A. Robinson. 2001. The colonial origins of comparative development: An empirical investigation. American Economic Review 91 (5): 1369–1401.

    Article  Google Scholar 

  • Acemoglu, D., S. Naidu, P. Restrepo, and J.A. Robinson. 2019. Democracy does cause growth. Journal of Political Economy 127 (1): 47–100.

    Article  Google Scholar 

  • Agler, R., and P. De Boeck. 2017. On the interpretation and use of mediation: Multiple perspectives on mediation analysis. Frontiers in Psychology 8: 1984.

    Article  Google Scholar 

  • Aisen, A., and F.J. Veiga. 2006. Does political instability lead to higher inflation? A panel data analysis. Journal of Money, Credit, and Banking 2: 1379–1389.

    Article  Google Scholar 

  • Aisen, A., and F.J. Veiga. 2008. Political instability and inflation volatility. Public Choice 135 (3–4): 207–223.

    Article  Google Scholar 

  • Aizenman, J. 1992. Competitive externalities and the optimal seigniorage. Journal of Money, Credit and Banking 24 (1): 61–71.

    Article  Google Scholar 

  • Arawatari, R., T. Hori, and K. Mino. 2018. On the nonlinear relationship between inflation and growth: A theoretical exposition. Journal of Monetary Economics 94: 79–93.

    Article  Google Scholar 

  • Babatunde, M.A., and M.I. Shuaibu. 2011. Money supply, inflation and economic growth in Nigeria. Asian-African Journal of Economics and Econometrics 11 (1): 147–163.

    Google Scholar 

  • Baklouti, N., and Y. Boujelbene. 2018. The nexus between democracy and economic growth: Evidence from dynamic simultaneous-equations models. Journal of the Knowledge Economy 9: 980–998.

    Article  Google Scholar 

  • Baron, R.M., and D.A. Kenny. 1986. The moderator–mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology 51 (6): 1173.

    Article  Google Scholar 

  • Barro, R.J. 1991. Economic growth in a cross section of countries. The Quarterly Journal of Economics 106 (2): 407–443.

    Article  Google Scholar 

  • Barro, R.J. 1996. Democracy and growth. Journal of Economic Growth 1 (1): 1–27.

    Article  Google Scholar 

  • Bernanke, B.S., T. Laubach, F.S. Mishkin, and A.S. Posen. 2018. Inflation targeting: Lessons from the international experience. Princeton University Press.

    Book  Google Scholar 

  • Binder, C., and R. Kamdar. 2022. Expected and realized inflation in historical perspective. Journal of Economic Perspectives 36 (3): 131–156.

    Article  Google Scholar 

  • Bizzarro, F., J. Gerring, C.H. Knutsen, A. Hicken, M. Bernhard, S.E. Skaaning, and S.I. Lindberg. 2018. Party strength and economic growth. World Politics 70 (2): 275–320.

    Article  Google Scholar 

  • Bruno, M., and W. Easterly. 1998. Inflation crises and long-run growth. Journal of Monetary Economics 41 (1): 3–26.

    Article  Google Scholar 

  • Cecchetti, S.G. 1999. Legal structure, financial structure, and the monetary policy transmission mechanism. Fed Reserve Bank N Y Econ Policy Rev. 5: 9–28.

    Google Scholar 

  • Chelliah, R., B. Hessel, and K. Margaret. 1975. Tax ratios and tax effort in developing countries 1969–1971. IMF Staff Paper 22: 187–205.

    Article  Google Scholar 

  • Chen, S., H. Zhang, and S. Wang. 2022. Trade openness, economic growth, and energy intensity in China. Technological Forecasting and Social Change 179: 121608.

    Article  Google Scholar 

  • Coase, R.H. 1937. The Nature of the firm. Economica 25: 386–405.

    Article  Google Scholar 

  • Cochran, W.G. 1957. Analysis of covariance: Its nature and uses. Biometrics 13 (3): 261–281.

    Article  Google Scholar 

  • Cruz, M., and S.A. Ahmed. 2018. On the impact of demographic change on economic growth and poverty. World Development 105: 95–106.

    Article  Google Scholar 

  • Cukierman, A., E. Sebastian, and T. Guido. 1992. Seigniorage and political economy. American Economic Review 82 (3): 537–555.

    Google Scholar 

  • Dahmani, M., M. Mabrouki, and A. Ben Youssef. 2022. ICT, trade openness and economic growth in Tunisia: What is going wrong? Economic Change and Restructuring 55 (4): 2317–2336.

    Article  Google Scholar 

  • de Haan, J., and W. Kooi. 2000. Does central bank independence really matter? New evidence for developing countries using a new indicator. Journal of Banking and Finance 24: 643–664.

    Article  Google Scholar 

  • Edwards, S., and G. Tabellini. 1991. Explaining fiscal policies and inflation in developing countries. Journal of International Money and Finance 10: S16–S48.

    Article  Google Scholar 

  • Fazio, D.M., T.C. Silva, B.M. Tabak, and D.O. Cajueiro. 2018. Inflation targeting and financial stability: Does the quality of institutions matter? Economic Modelling 71: 1–15.

    Article  Google Scholar 

  • Fischer, S. 1993. The role of macroeconomic factors in growth. Journal of Monetary Economics 32 (3): 485–512.

    Article  Google Scholar 

  • Fischer S. (1983), Inflation and Growth, NBER working paper n0 1235.

  • Frisch, R. (1938). Statistical versus theoretical relations in economic macrodynamics. Paper given at League of Nations. Reprinted in D. F. Hendry & M. S. Morgan (1995). The Foundations of Econometric Analysis, Cambridge University Press.

  • Garriga, A.C., and C.M. Rodriguez. 2020. More effective than we thought: Central bank independence and inflation in developing countries. Economic Modelling 85: 87–105.

    Article  Google Scholar 

  • Ghobadi, S., and A. Komijani. 2023. An analysis of the relationship between monetary-exchange rate policies and the public debt and theirs effects on inflation and economic growth in Iran. International Economics Studies 37 (2): 1–21.

    Google Scholar 

  • González, A., Teräsvirta, T., Dijk, D. V., & Yang, Y. (2005). Panel Smooth Transition Regression Models.[SSE/EFI Working Paper Series in Economics and Finance, No. 604.]. Rotterdam: Econometric Institute, Erasmus University Rotterdam.

  • Granger, C.W. 1969. Investigating causal relations by econometric models and cross-spectral methods. Econometrica Journal of the Econometric Society 2: 424–438.

    Article  Google Scholar 

  • Granger, C.W., and T. Terasvirta. 1993. Modelling non-linear economic relationships. Oxford: Oxford University Press.

    Book  Google Scholar 

  • Gurr, T.R. 1974. Persistence and change in political systems, 1800–1971. American Political Science Review 68 (4): 1482–1504.

    Article  Google Scholar 

  • Gurr, T.R., K. Jaggers, and W.H. Moore. 1990. The transformation of the Western state: The growth of democracy, autocracy, and state power since 1800. Studies in Comparative International Development 25: 73–108.

    Article  Google Scholar 

  • Haavelmo, T. 1943. The statistical implications of a system of simultaneous equations. Econometrica, Journal of the Econometric Society 2: 1–12.

    Article  Google Scholar 

  • Hayes, A.F. 2017. Introduction to mediation, moderation, and conditional process analysis: A regression-based approach. Guilford: Guilford Publications.

    Google Scholar 

  • Hossin, M.S. 2015. The relationship between inflation and economic growth of Bangladesh: An empirical analysis from 1961 to 2013. International Journal of Economics, Finance and Management Sciences 3 (5): 426–434.

    Article  Google Scholar 

  • Huchet-Bourdon, M., C. Le Mouël, and M. Vijil. 2018. The relationship between trade openness and economic growth: Some new insights on the openness measurement issue. The World Economy 41 (1): 59–76.

    Article  Google Scholar 

  • Ibarra, R., & Trupkin, D. (2011). The relationship between inflation and growth: A panel smooth transition regression approach for developed and developing countries. Banco Central del Uruguay Working Paper Series, 6.

  • Ibarra, R., and D.R. Trupkin. 2016. Reexamining the relationship between inflation and growth: Do institutions matter in developing countries? Economic Modelling 52: 332–351.

    Article  Google Scholar 

  • Imai, K., L. Keele, and D. Tingley. 2010. A general approach to causal mediation analysis. Psychological Methods 15 (4): 309–334.

    Article  Google Scholar 

  • Judd, C.M., and D.A. Kenny. 1981. Process analysis: Estimating mediation in treatment evaluations. Evaluation Review 5 (5): 602–619.

    Article  Google Scholar 

  • Khan, M., and W. Hanif. 2020. Institutional quality and the relationship between inflation and economic growth. Empirical Economics 58 (2): 627–649.

    Article  Google Scholar 

  • Khan, M.S., and A.S. Senhadji. 2001. Threshold effects in the relationship between inflation and growth. IMF Staff Papers 48 (1): 1–21.

    Article  Google Scholar 

  • Kong, Q., D. Peng, Y. Ni, X. Jiang, and Z. Wang. 2021. Trade openness and economic growth quality of China: Empirical analysis using ARDL model. Finance Research Letters 38: 101488.

    Article  Google Scholar 

  • Kremer, S., A. Bick, and D. Nautz. 2013. Inflation and growth: New evidence from a dynamic panel threshold analysis. Empirical Economics 44 (2): 861–878.

    Article  Google Scholar 

  • La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R.W. Vishny. 1998. Law and finance. Journal of Political Economy 106 (6): 1113–1155.

    Article  Google Scholar 

  • Lange, T., S. Vansteelandt, and M. Bekaert. 2012. A simple unified approach for estimating natural direct and indirect effects. American Journal of Epidemiology 176 (3): 190–195.

    Article  Google Scholar 

  • Lim, J.J. 2021. The limits of central bank independence for inflation performance. Public Choice 186 (3): 309–335.

    Article  Google Scholar 

  • Luukkonen, R., P. Saikkonen, and T. Teräsvirta. 1988. Testing linearity against smooth transition autoregressive models. Biometrika 75 (3): 491–499.

    Article  Google Scholar 

  • Ma, J., J. Shi, D. Luo, and Y. Che. 2019. Effect of trade openness on regional economic growth in China: Revisiting the discussion. Applied Economics Letters 26 (16): 1313–1316.

    Article  Google Scholar 

  • MacKinnon, D.P. 2008. Introduction to statistical mediation analysis, 1st ed. New York: Routledge.

    Google Scholar 

  • MacKinnon, D.P., G. Warsi, and J.H. Dwyer. 1995. A simulation study of mediated effect measures. Multivariate Behavioral Research 30 (1): 41–62.

    Article  Google Scholar 

  • Maestas, N., K.J. Mullen, and D. Powell. 2023. The effect of population aging on economic growth, the labor force, and productivity. American Economic Journal: Macroeconomics 15 (2): 306–332.

    Google Scholar 

  • Mallik, G., and A. Chowdhury. 2001. Inflation and economic growth: Evidence from four south Asian countries. Asia-Pacific Development Journal 8 (1): 123–135.

    Google Scholar 

  • Manh, P.H., H.X. Lam, T.T. Kien, and N.T.T. Ha. 2022. Investment & economic growth: A nexus between domestic investment and foreign direct investment in Vietnam. International Journal of Economics and Finance Studies 14 (4): 1–18.

    Google Scholar 

  • Marshall, M.G. & Gurr, T.R. (2020) Polity5: political regime characteristics and transitions, 1800–2018. Center for Systemic Peace. Available at: http://www.systemicpeace.org/inscr/p5manualv2018.pdf [Accessed 23th Mai 2023]

  • Marshall, M. G., Jaggers, K., & Gurr, T. R. (2010). Polity iv project: Political regime characteristics and transitions, 1800–2009. Center for Systemic Peace, 1973–2019.

  • Morvillier, F. 2020. Do currency undervaluations affect the impact of inflation on growth? Economic Modelling 84: 275–292.

    Article  Google Scholar 

  • Najaf, R. 2017. The causal relationship between inflation and economic growth in Nigeria. Journal of Accounting and Marketing 6: 208–218.

    Article  Google Scholar 

  • Ndoricimpa, A. 2017. Threshold effects of inflation on economic growth: Is Africa different? International Economic Journal 31 (4): 599–620.

    Article  Google Scholar 

  • Nguyen, T.Q., I. Schmid, and E.A. Stuart. 2021. Clarifying causal mediation analysis for the applied researcher: Defining effects based on what we want to learn. Psychological Methods 26 (2): 255.

    Article  Google Scholar 

  • North, D.C. 1991. Institutions. Journal of Economic Perspectives 5: 97–112.

    Article  Google Scholar 

  • Olander, P. 2019. Economic Diversification and Institutional Quality—Issues of Concentrated Interests. Studies in Comparative International Development 54 (3): 346–364.

    Article  Google Scholar 

  • Papadamou, S., C. Siriopoulos, and N.A. Kyriazis. 2020. A survey of empirical findings on unconventional central bank policies. Journal of Economic Studies 47 (7): 1533–1577.

    Article  Google Scholar 

  • Phelps, E.S. 1973. Inflation in the theory of public finance. The Swedish Journal of Economics 8: 67–82.

    Article  Google Scholar 

  • Raghutla, C. 2020. The effect of trade openness on economic growth: Some empirical evidence from emerging market economies. Journal of Public Affairs 20 (3): e2081.

    Article  Google Scholar 

  • Rodrik, D. 2005. Growth strategies. In Handbook of economic growth, ed. P. Aghion and S. Durlauf, 967–1014. Amsterdam: North-Holland.

    Google Scholar 

  • Sabir, S., A. Rafique, and K. Abbas. 2019. Institutions and FDI: Evidence from developed and developing countries. Financial Innovation 5 (1): 1–20.

    Article  Google Scholar 

  • Salahodjaev, R., and S. Chepel. 2014. Institutional quality and inflation. Modern Economy 58: 219–223.

    Article  Google Scholar 

  • Sala-i-Martin, X.X. 1997. I just ran two million regressions. The American Economic Review 2: 178–183.

    Google Scholar 

  • Sanga, D., and S.L. Gui-Diby. 2020. Inflation Threshold Levels and Economic Growth in the Franc Zone Countries. Singapore: The World Bank.

    Book  Google Scholar 

  • Sequeira, T.N. 2021. Inflation, Economic Growth and Education Expenditure. Economic Modelling 10: 5475. https://doi.org/10.1016/j.econmod.2021.02.016.

    Article  Google Scholar 

  • Serletis, A., and J. Liu. 2020. Inflation and economic activity in advanced and emerging economies. International Journal of Finance & Economics. https://doi.org/10.1002/ijfe.2367.

    Article  Google Scholar 

  • Shabbir, M.S., M. Bashir, H.M. Abbasi, G. Yahya, and B.A. Abbasi. 2021. Effect of domestic and foreign private investment on economic growth of Pakistan. Transnational Corporations Review 13 (4): 437–449.

    Article  Google Scholar 

  • Udeagha, M.C., and N. Ngepah. 2021. The asymmetric effect of trade openness on economic growth in South Africa: A nonlinear ARDL approach. Economic Change and Restructuring 54 (2): 491–540.

    Article  Google Scholar 

  • VanderWeele, T.J. 2015. Explanation in causal inference: Methods for mediation and interaction. Oxford: Oxford University Press.

    Google Scholar 

  • Walsh, C.E. 1995. Recent central-bank reforms and the role of price stability as the sole objective of monetary policy. NBER Macroeconomics Annual 10: 237–252.

    Article  Google Scholar 

  • Weber, M., F. D’Acunto, Y. Gorodnichenko, and O. Coibion. 2022. The subjective inflation expectations of households and firms: Measurement, determinants, and implications. Journal of Economic Perspectives 36 (3): 157–184.

    Article  Google Scholar 

  • Williamson, O.E. 1987. Transaction cost economics: The comparative contracting perspective. Journal of Economic Behavior & Organization 8 (4): 617–625.

    Article  Google Scholar 

  • Wright, S. 1921. Correlation and causation. Journal of Agricultural Research 20: 557–585.

    Google Scholar 

  • Wright, S. 1934. The method of path coefficients. Annals of Mathematical Statistics 5 (3): 161–215.

    Article  Google Scholar 

  • Ye, J., Z. Chen, and B. Peng. 2021. Is the demographic dividend diminishing in China? Evidence from population aging and economic growth during 1990–2015. Review of Development Economics 25 (4): 2255–2274.

    Article  Google Scholar 

  • Yilmazkuday, H. 2022. Inflation and growth: The role of institutions. Journal of Economics and Finance 46 (1): 167–187.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Faculty of Economics, University of Yaounde II, Soa, Cameroon

    Dieudonné Mignamissi

  2. Faculty of Economics, The University of Dschang, Dschang, Cameroon

    Séraphin Brice Minkoé Bikoula

  3. Faculty of Economics, Cheikh Anta Diop University, Dakar, Senegal

    Thierno Thioune

Authors
  1. Dieudonné Mignamissi
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Séraphin Brice Minkoé Bikoula
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Thierno Thioune
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Dieudonné Mignamissi.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Mignamissi, D., Minkoé Bikoula, S.B. & Thioune, T. Inflation and Economic Growth in Sub-Saharan Africa: The Role of Institutions. J. Quant. Econ. 21, 847–871 (2023). https://doi.org/10.1007/s40953-023-00366-7

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40953-023-00366-7

Keywords

JEL Classification

Search

Navigation