inflation-growth nexus in Botswana: Can lower inflation really spur growth in the country?

Mothuti, Gosego and Phiri, Andrew (2018): inflation-growth nexus in Botswana: Can lower inflation really spur growth in the country?

Abstract

Does inflation affect economic growth in Botswana over the short-run and long-run? In applying bounds procedure for modelling ARDL cointegation effects applied to empirical data collected between 1975 and 2016 we find that this hypothesis does not hold true for Botswana as inflation is found to be insignificantly related with economic growth over both the short and long-run. Our growth equation estimates point to exports (positive), government size (negative) and an Pula/Dollar exchange rate (negative) as being significantly correlated with steady-state GDP growth. Further empirical exercises show that an appreciated Pula/dollar exchange rate increases inflation whilst bearing no effect on economic growth. Conversely, a depreciated Pula/Dollar exchange simultaneously decreases inflation and economic growth for the Botswana economy. Policymakers should be this aware that attainment of lower inflation rates which occurs through a depreciated Pula/Dollar currency will only retard economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation; Economic growth; Exchange rates; Bank of Botswana; Nonlinear autoregressive distributive lag (N-ARDL) model.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies

References

Acemoglu D., Johnson S. and Robinson J. (2001), “An African success story: Botswana”, MIT Department of Economics Working Papers No. 01-37, July.

Adusei M. (2012), “The inflation-growth nexus: Estimating the threshold effect for South Africa”, Journal of Money, Investment and Banking, 26, 87-93.

Atta J., Jefferis K. and Siwana-Ndai P. (1999), “Exchange rate policy and price determination in Botswana”, AERC Research Paper 93, March.

Barro R. (1991), “Economic growth in a cross section of countries”, Quarterly Journal of Economics, 106(425), 407-443.

Barro R. (1995), “Inflation and growth”, NBER Working Paper No. 5326, October.

Barro R. (2013), “Inflation and growth”, Annals of Economics and Finance, 14(1), 121-144.

Barro R. and Sala-i-Martin X. (1995), “Economic growth”, New York: McGRaw-Hill.

Bick A. (2010), “Threshold effects of inflation on economic growth in developing countries”, Economic Letters, 108(2), 126-129.

Bruno and Easterly (1998), Inflation crisis and long-run growth”, Journal of Monetary Economics, 41(1), 3-26.

Clark J. (1991), “The exchange rate and the price level in a small open economy: Botswana”, Journal of Policy Modeling, 13(2), 309-315.

Cooley T. and Hansen G. (1989), “The inflation tax in a real business cycle model”, American Economics Review, 79(4), 733-748.

De Long and Summers (1991), “Equipment Investment and economic growth”, The Quarterly Journal of Economics, 106(2), 445-502.

Dukker D., Gomis-Porqueras P. and Hernandez-Verme P. (2005), “Threshold effects in the relationship between inflation and growth: A new panel-data approach”, MPRA Working Paper No. 38225, February.

Ee C. (2016), “Export-led growth hypothesis: Empirical evidence from selected Sub-Saharan African countries”, Procedia Economics and Finance, 35, 232-240.

Eggoh J. and Kahn M. (2014), “On the nonlinear relationship between inflation and growth”, Research in Economics, 68(2), 133-143.

Fischer S. (1993), “The role of macroeconomic factors of growth”, Journal of Monetary Economics, 32(3), 485-512.

Ghosh and Phillips (1998), “Warning: Inflation may be harmful to your growth”, IMF Staff Papers, 45(4), 672-710.

Greenwood J. and Huffman G. (1987), “A dynamic equilibrium model of inflation and unemployment”, Journal of Monetary Economics, 19(2), 203-228.

Guesh J. (1997), “Government size and economic growth in developing countries: A political-economy framework”, Journal of Macroeconomics, 19(1), 175-192.

Gyimah-Brempong K., Paddison O. and Mitiku W. (2006), “Higher education and economic growth in Africa”, The Journal of Development Studies, 42(3), 509-529.

Harvey R. (2015), “From diamonds to coal? Critical reflections on Botswana’s economic future”, The Extractive Industries and Society, 2(4), 827-839.

Hineline D. (2007), “Examining the robustness of the inflation and growth relationship”, Southern Economic Journal, 73(4), 1020-1037.

Ibarra R. and Trupkin D. (2016), “Re-examining the relationship between inflation and growth: Do institutions matter in developing countries”, Economic Modelling, 52(B), 332-351.

Iyke B. and Odhimabo N. (2017), “Inflationary thresholds, financial development and economic growth: New evidence from two West African countries”, Global Economy Journal, 17(2), 1-11.

Kahn M. and Senhadji A. (2001), “Threshold effects in the relationship between inflation and growth”, IMF Staff Papers, 48(1), 1-21.

Kebret-Taye H. (2013), “The determinants of inflation in Botswana and Bank of Botswana’s medium-term objective range”, Botswana Journal of Economics, 11(15), 57-74.

Kremer S., Bick A. and Nautz D. (2009), “Inflation and growth: New evidence from a dynamic panel threshold analysis”, Empirical Economics, 44(2), 861-878.

Lesotho O., Motlaleng G. and Ntsosa M. (2016), “Stock market returns and exchange rates in Botswana”, African Journal of Economic Review, 4(2), 16-42.

Leshoro T. (2012), “Estimating the inflation threshold for South Africa”, ERSA Working Papers No. 285, May.

Levine R. and Renelt D. (1992), A sensitivity analysis of cross-country regressions”, American Economic Review, 82(4), 942-963.

Majumder S. (2016), “Inflation and its impacts on economic growth of Bangladesh”, American Journal of Marketing Research, 2(1), 17-26.

Mavikela N., Mhaka S. and Phiri A. (2017), “The inflation-growth relationship in SSA inflation-targeting countries”, MPRA Paper No. 82141, October.

Mkhatshwa Z., Tijani A. and Masuku M.(2015), “Analysis of the relationship between inflation, economic growth and agricultural growth in Swaziland from 1980-2013”, Journal of Economics and Sustainable Development, 6(18), 189-204.

Mogotsi I. (2002), “Botswana’s diamonds boom: Was there a Dutch disease?”, South African Journal of Economics, 70(1), 128-156.

Mubarik Y. (2005), “Inflation and growth: An estimate of the threshold level of inflation in Pakistan”, SBP Research Bulletin, 1-2, 35-44.

Munir Q. and Mansur K. (2009), “Non-linearity between inflation rate and GDP growth in Malaysia”, Economics Bulletin, 29(3), 1555-1569.

Munyeka (2014), “The relationship between economic growth and inflation in the South African economy”, Mediterranean Journal of Social Sciences, 5(15), 119-129.

Ndoricimpa A. (2017), “Threshold effects of inflation on economic growth” Is Africa different?”, International Economic Journal, 31(4), 599-620.

Pegg S. (2010), “Is there a Dutch disease in Botswana?”, Resource Policy, 35(1), 14-19.

Phetwe M. and Molefe L. (2016), “Inflation and economic growth: Estimation of a threshold level of inflation in Botswana”, Bank of Botswana Research Bulletin, 29(1),12-23

Phiri A. (2010), “At level is inflation least detrimental towards finance-growth activity in South Africa?”, Journal of Sustainable Development in Africa, 12(6), 354-364.

Phiri A. (2017), “Changes in inflation persistence prior and subsequent to the subprime crisis: What are the implications for South Africa?”, Journal of Reviews on Global Economics, 6, 198-207.

Phiri A. (2018), “Nonlinear impact of inflation on economic growth in South Africa”, International Journal of Sustainable Economy, 10(1), 1-17.

Sala-i-Martin X. (1997), “I just ran four million regressions”, American Economic Review, 87(2), 178-183.

Sarel M. (1996), “Nonlinear effects of inflation on economic growth”, IMF Staff Papers, 43(1), 199-215.

Setlhare L. (2004), “Bank of Botswana’s reaction function: Modelling Botswana’s monetary policy strategy”, South African Journal of Economics, 72(2), 384-406.

Seleteng M., Bittencourt M. and van Eyden R. (2013), “Non-linearities in the inflation-growth nexus in the SADC region: A penal smooth transition regression approach”, Economic Modelling, 30(C), 149-156.

Shin Y., Yu B. and Greenwood-Nimmo M. (2014), “Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework”, Festsschrift in honor of Peter Schmidt: Econometric Methods and Applications, eds. By R. Sickels and W. Horace, Springer, 281-314.

Sidrauski M. (1967), “Rational choice and patterns of economic growth in a monetary economy”, American Economic Review, 57(2), 534-544.

Solow R. (1965), “A contribution to the theory of economic growth”, Quarterly Journal of Economics, 70(1), 65-94.

Stockman M. (1981), “Anticipated inflation and capital stock in a Cash-in-Advance Economy”, Journal of Monetary Economics, 8(3), 387-393.

Taye H. (2011), “Botswana’s debt sustainability: Tracking the path”, BIDPA Working Paper No. 28, March.

Tobin J. (1965), “Money and economic growth”, Econometrica, 33(4), 671-684.

Tung L. and Thanh P. (2015), “Threshold in the relationship between inflation and economic growth: Empirical evidence in Vietnam”, Asian Social Sciences, 11(10), 105-112.

Uneze E. (2013), “The relation between capital formation and economic growth: Evidence from sub-Saharan African countries”, Journal of Economic Policy Reform, 16(3), 272-286.

Vaona A. (2012), “Inflation and growth in the long run: A New Keynesian theory and further semiparametric evidence”, Macroeconomics Dynamics, 16(1), 94-132.

Vinayagathasan T. (2013), “Inflation and economic growth: A dynamic panel threshold analysis for Asian economies”, Journal of Asian economies, 26, 31-41.