Smooth transition regression model relating inflation to economic growth in Tunisia

Abstract

This paper examines the nature of the relationship between financial development and economic growth between 1965 and 2019, using the non-linear logistic smooth transition regression model and considering inflation as a threshold financial development. The results show the existence of a non-linear abrupt relationship with an inflation threshold equal to 3.63%. Specifically, when inflation is below 3.63 percent, all variables, including inflation, have a significant and positive impact on economic growth. However, when inflation exceeds the estimated threshold, inflation has a significant and negative impact with an elasticity equal to -0.365. Therefore, it is necessary to apply such measures to reduce the inflation pressures and promote economic growth through development finance by the banking sector. JEL Classification: C24; E31; E44; O11.