Threshold Effects of Inflation on Growth in the ASEAN-5 Countries : A Panel Smooth Transition Regression Approach

This study analyzes the linkage between inflation and growth in the ASEAN-5 countries over the period 1980-2011, namely Indonesia, Malaysia, the Philippines, Thailand and Vietnam using a Panel Smooth Transition Regression (PSTR) model. Furthermore, we also check robustness by using GMM-IV specification. The study finds that there exists a statistically significant negative relationship between inflation and growth for the inflation rates above the threshold level of 7.84 %, above which inflation starts impeding economic growth in the ASEAN-5 countries. The results suggest that central banks in the ASEAN-5 countries could improve economic growth by reducing inflation when it is above or near the estimated thresholds. The threshold inflation level can be considered, therefore, as inflation targeting indicator to conduct monetary policy