Inflation Thresholds and Stock Market Development: Evidence of the Nonlinear Nexus From an Emerging Economy

Abstract

The paper examines the existence of threshold effects in the relationship between inflation and stock market development in Jordan. It hypothesizes that inflation rate has positive effects on the market development before it reaches a certain level. A controlled threshold model is estimated over annul period from 1980 to 2018. We provide evidence that the nexus between inflation and stock market development is nonlinear and the inflation threshold is detected at 1.6%. The association is found positive before the threshold level but negative beyond it. However, the inflation-stock market development relationship flattens out significantly for inflation above 6%. These findings are robust to alternative estimation techniques.