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Original scientific paper

https://doi.org/10.1080/1331677X.2023.2299991

Threshold effects of inflation on the FDI – growth nexus: evidence from inflation-targeting countries in sub-Saharan Africa

Emmanuel Mensah
Rachel Odoley Mensah
David Aboagye Danquah


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Abstract

The purpose of this study is to examine the threshold effect of
inflation on the foreign direct investment (FDI) – economic
growth nexus in sub-Saharan Africa using panel samples of countries
that have adopted an inflation-targeting regime. The study
sourced data from the World Bank’s World Development
Indicators over a period of 1982–2020 and adopted the fixedeffect
panel threshold model approach for its analysis. The
findings reveal two separate thresholds of inflation in the FDI –
growth nexus. The growth-enhancing effect of FDI is largely
realized when inflation is below the optimal threshold level of
7.26%. Beyond the second threshold level of 16.49%, the beneficial
effect of FDI on growth is seen to diminish in terms of effectsize.
This study provides new insights into the growth effect of
FDI and the role of inflation levels in this nexus. The thresholds of
inflation and the attendant size-effect of FDI on growth can be
benchmarks for Africa and other developing and emerging economies
in assessing their situations. As African monetary authorities
choose which inflation targets to set for their monetary policies,
the findings raise significant implications for them.

Keywords

Economic growth; FDI; fixed-effect panel threshold regression; inflation; inflation-targeting countries; Sub-Saharan Africa

Hrčak ID:

321739

URI

https://hrcak.srce.hr/321739

Publication date:

11.4.2024.

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