Exploring the Non-Linear Relationship between Economic Growth and Its Main Drivers over the Last Decade in EU: Evidence from a Panel Smooth Transition Regression

Abstract

Rising oil, coal, and natural gas prices linked to the conflict between Russia and Ukraine have raised concerns about global economic growth and inflationary trends (International Monetary Fund (IMF), 2023). It is therefore interesting to examine the possible impact of oil prices on the relationship between economic growth and its determinants, including inflation. This article addresses this issue, using a panel dataset of 26 EU countries over the period 2011–2023 and studying the evolution of their growth within a Panel Smooth Transition Regression (PSTR) framework. Our empirical findings show that the real oil price is a significant transition variable between two extreme regimes and, accordingly, reveal that the determinants of economic growth have a time-varying intensity; notably, domestic investment, government spending, budget deficit, energy consumption of (non)renewable energy, trade balance, population growth, monetary policy as captured by the term spread and the M2 money growth, as well as the energy-related inflation.