Working Paper - 216 - Inflation Targeting Monetary Policy, Inflation Volatility and Economic Growth in South Africa
Wolassa Lawisso Kumo ()
Additional contact information
Wolassa Lawisso Kumo: African Development Bank, Postal: 15 Avenue du Ghana P.O.Box 323-1002 Tunis-Belvedère, Tunisia, https://www.afdb.org/en/knowledge/publications
Working Paper Series from African Development Bank
Abstract:
This paper investigates the impact of inflation targeting monetary policy and inflation volatility on economic growth in South Africa. Inflation volatility is measured by conditional variance generated by fitting an empirical Generalized Autoregressive Conditional Hetroskedasticity (GARCH) model to a seasonally adjusted annualized quarterly consumer price inflation for the period 1960Q1-2013Q3. The volatility measure, together with macroeconomic control variables, was used to estimate economic growth models for two periods corresponding to two monetary policy regimes and a third period covering the full sample. The first period corresponds to the pre-inflation targeting regime covering 1960Q1-1998Q4. During this period, the country had adopted various monetary policy frameworks including exchange-rate targeting, discretionary monetary policy, monetary-aggregate targeting and an eclectic approach. This period was largely characterized by high and more volatile inflation. The inflation volatility in turn had statistically significant negative impact on economic growth during this period. Nonetheless, inflation volatility did not have statistically significant impact on real economic growth during the inflation targeting monetary policy period, i.e. 2000Q1-2013Q3. The empirical results for the combined growth model are consistent with the findings for the two periods. The implication of this is that by adopting the inflation targeting monetary policy framework since 2000, South Africa has succeeded in achieving low and stable general price level thereby creating a conducive environment for economic growth. The higher growth period of the mid 2000s followed the introduction of inflation targeting monetary policy regime. Nevertheless, higher Sacrifice Ratio of disinflation and entrenched structural bottlenecks continue to undermine growth and stifle the spillover effects from low and stable inflation to real economic activities. The government may consider to urgently implement structural reforms to unlock the economic growth potential while ensuring more flexibility in the disinflation policy regime.
Date: 2015-01-20
New Economics Papers: this item is included in nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:
Downloads: (external link)
https://www.afdb.org/fileadmin/uploads/afdb/Docume ... n_South_Africa_B.pdf (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:adb:adbwps:2154
Access Statistics for this paper
More papers in Working Paper Series from African Development Bank African Development Bank Group, Avenue Joseph Anoma, 01 BP 1387 Abidjan 01, Côte d'Ivoire. Contact information at EDIRC.
Bibliographic data for series maintained by Adeleke Oluwole Salami ().