Nonlinear impact of inflation on economic growth in South Africa: a smooth transition regression analysis
by Andrew Phiri
International Journal of Sustainable Economy (IJSE), Vol. 10, No. 1, 2018

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.

Online publication date: Wed, 13-Dec-2017

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