Inflation Targeting Band, the Government Debt, and Capital Formation Nexus in South Africa

Eliphas Ndou and Nombulelo Gumata
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Nombulelo Gumata: Eldoreigne X3

Chapter Chapter 7 in Fiscal Policy Shocks and Macroeconomic Growth in South Africa, 2023, pp 93-107 from Springer

Abstract: Abstract This chapter explores whether the adoption of the 3 to 6 per cent inflation targeting band changed the structural relationship between government debt and capital formation in South Africa. Evidence shows that the magnitude of crowding-out effects is smaller when inflation is below 6 per cent and within 3 to 6 per cent, compared to above the 6 per cent threshold. The low inflation regime neutralises the crowding-out effects of positive government debt shocks on capital formation, whereas the high inflation regime amplifies the effects. These results imply that low inflation is needed to mitigate the crowding-out effects of capital formation by rising government debt. The policy implications of these findings are that price stability matters and that monetary policy has a role to play in minimising the size of the crowding-out effects.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-37755-6_7

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DOI: 10.1007/978-3-031-37755-6_7

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