Inflation and Economic Growth in Sierra Leone: A Threshold Regression Approach

Abu Bakarr Tarawalie
Director of Research and Statistics, West African Monetary Institute (WAMI), Gulf House, Accra, Ghana.
In this study, the relationship between inflation and economic growth in Sierra Leone was examined using annual data for 1970 to 2008.  Specifically, the study used the conditional least square econometric technique to estimate the threshold level of inflation conducive for growth, as well as identifying the key determinants of economic growth in Sierra Leone.

In addition, the Granger causality test was employed to test the causal relationship between inflation and economic growth.
The granger causality result showed a unidirectional causality, running from inflation to real GDP, with no feedback from output growth to inflation. The findings from the threshold model clearly revealed a negative relationship between inflation and growth. The estimated threshold regression model suggested ten per cent as the threshold level of inflation, above which inflation retarded economic growth. The study also revealed that investment, population growth and political instability (proxy by civil war) were the major determinants of growth during the review period. Based on the results, monetary authorities should maintain inflation at its threshold level, as it may be helpful for the achievement of sustainable economic growth.

Keywords: Economic growth, Granger causality, inflation, Sierra Leone, Threshold model.

JEL Classification: C13, C51, E31, O40