Nonlinear impact of inflation on economic growth in South Africa: a smooth transition regression analysis

Andrew Phiri

International Journal of Sustainable Economy, 2018, vol. 10, issue 1, 1-17

Abstract: In this paper, we challenge the notion of a monotonic relationship between inflation and economic growth in South Africa. In particular, we establish threshold effects in the inflation-growth relationship using a smooth transition regression (STR) model which is applied on data collected between 2001: Q1 and 2016: Q2. Our empirical results confirm a threshold of 5.30% in which the effects of inflation on economic growth are positive below this threshold whereas inflation exerts adverse effect on economic growth at inflation levels above this level. In a nutshell, our study offers support in favour of the optimal level of inflation lying between the current 3-6% inflation target and more specifically suggests that the monetary authorities should slightly lower the upper level of this target to about 5.30% as a means creating a more conducive financial environment for promoting higher economic growth.

Keywords: inflation; economic growth; smooth transition regressions; STRs; thresholds; South African Reserve Bank; SARB. (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijsuse:v:10:y:2018:i:1:p:1-17

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