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

Authors: Andrew Phiri

Addresses: Department of Economics, Faculty Business and Economic Studies, Nelson Mandela University, Port Elizabeth 6031, South Africa

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.

DOI: 10.1504/IJSE.2018.088624

International Journal of Sustainable Economy, 2018 Vol.10 No.1, pp.1 - 17

Received: 28 Sep 2016
Accepted: 08 May 2017
Published online: 13 Dec 2017 *

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