Inflation and Economic Growth in Zambia: A Threshold Autoregressive (TAR) Econometric Approach

This study examines threshold effects of inflation on economic growth for the Zambian economy using quarterly data collected between 1998 and 2011. This objective is tackled through the use of a threshold autoregressive (TAR) model and the conditional least squares (CLS) estimation technique. As a by-product of utilizing this estimation technique, the paper is able to identify whether there could be an optimal inflation level at which the adverse effects of inflation on economic growth are subdued, or similarly, a level of inflation at which the positive effects of inflation on economic growth are maximized. In this respect, the paper estimates an inflation threshold level of 22.5% for the observed data. These results indicate that economic growth in Zambia can be stimulated even in a moderately high inflation environment. Particularly, the causality analysis identifies the credit sector and exchange rate developments as being crucial channels towards ensuring enhanced economic performance in the Zambian economy.