Inflation and social welfare in Sub-Saharan Africa: Does subsidy policy matter?

This paper investigates the threshold effects of the interaction between subsidy policy and inflation on social welfare in the Sub-Saharan Africa (SSA) countries over the period 2000–2020. In order to investigate the aforementioned relationship, the methodology employed involved cross-referencing an indicator of subsidy policy with an inflation indicator, with the objective of subsequently estimating a two-stage least squares (2SLS) regression and a Panel Threshold Regression (PTR). The results show that subsidy policy has a negative effect on social welfare depending on the inflation regime. When inflation rates remain below the threshold of 14.47%, this effect is less pronounced. Above this threshold, any subsidy policy harms the well-being of people in sub-Saharan Africa. The robustness test confirms the consistency of the results obtained under various specifications: adding control variables, using an alternative dependent variable, changing the measure of welfare, using a different threshold variable, comparing with a competing variable, and excluding outliers, particularly countries experiencing hyperinflation. From a policy perspective, this study recommends that SSA countries must improve welfare by merging subsidy policy with a less level inflation.