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

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.