Inflation, interest rate and economic growth nexuses in SACU countries

Taderera, Christie and Runganga, Raynold and Mhaka, Simbarashe and Mishi, Syden (2021): Inflation, interest rate and economic growth nexuses in SACU countries.

Abstract

Various theories ascertain that there is a positive relationship between inflation and interest rate. Developed and developing economies are still in search of an optimum inflation rate that increases economic growth. The SACU members has recorded low growths levels over the past years coupled with low inflation rates. This study examines the relationship between inflation rate, interest rate and economic growth in Southern African Customs Union (SACU) countries. Panel data for SACU countries covering the period 1991 to 2018 was analysed using Pooled Mean Group (PMG) estimators which are Panel Autoregressive Distributed Lag (ARDL) model, Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) to enable isolating short and long run effects and for robustness.The results of the study show that inflation has a positive impact on economic growth while lending rate has a negative impact on growth in the long run. These results imply that policymakers should allow a high sustainable inflation rate in order to promote economic growth while interest rate can be used as a monetary policy instrument to achieve the desired inflation rate that will affect economic growth positively.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation, Interest rate, Economic growth, Southern African Customs Union
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O42 - Monetary Growth Models; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

References

Akume, D., Mukete, E.M. and Njimanted, F.G., 2016. The Impact of Key Monetary Variables on the Economic Growth of the CEMAC Zone. Expert Journal of Economics, 4(2).

Ayres, K., Belasen, A.R. and Kutan, A.M., 2014. Does inflation targeting lower inflation and spur growth?. Journal of Policy Modeling, 36(2), pp.373-388.

Bonga-Bonga, L. and Simo-Kengne, B.D., 2018. Inflation and Output Growth Dynamics in South Africa: Evidence from the Markov Switching Vector Autoregressive Model. Journal of African Business, 19(1), pp.143-154.

Blanchard, O.J. and Kiyotaki, N., 1987. Monopolistic competition and the effects of aggregate demand. The American Economic Review, pp.647-666.

Chipote, P. and Makhetha-Kosi, P., 2014. Impact of monetary policy on economic growth: a case study of South Africa. Mediterranean Journal of Social Sciences, 5(15), p.76.

Chirwa, T.G. and Odhiambo, N.M., 2017. Sources of economic growth in Zambia: An empirical investigation. Global Business Review, 18(2), pp.275-290.

Denbel, F.S., Ayen, Y.W. and Regasa, T.A., 2016. The relationship between inflation, money supply and economic growth in Ethiopia: Co integration and Causality Analysis. International Journal of Scientific and Research Publications, 6(1), pp.556-565.

Dornbusch, R. S., Fischer, S. & Kearney, C. 1996. Macroeconomics. Sydney: The McGraw-Hill Companies, Inc.

Eggoh, J.C. and Khan, M., 2014. On the nonlinear relationship between inflation and economic growth. Research in Economics, 68(2), pp.133-143.

Friedman, M., 1961. The lag in effect of monetary policy. Journal of Political Economy, 69(5), pp.447-466.

Geetha, C., Mohidin, R., Chandran, V.V. and Chong, V., 2011. The relationship between inflation and stock market: Evidence from Malaysia, United States and China. International journal of economics and management sciences, 1(2), pp.1-16.

Gokal, V. and S. Hanif 2004. Relationship between Inflation and Economic Growth, Economics Department, Reserve Bank of Fiji, Suva, Fiji, Working Paper 2004/04

Harswari, M.H.A.B.N and Hamza, S.M. 2017. The impact of interest rate on economic development: A study on asian countries. International Journal of Accounting & Business Management, vol 5, no. 1, pp.180-188.

Hasanov, M. and Omay, T., 2011. The relationship between inflation, output growth, and their uncertainties: Evidence from selected CEE countries. Emerging Markets Finance and Trade, 47(sup3), pp.5-20.

Havi, E.D.K. and Enu, P., 2014. The effect of fiscal policy and monetary policy on Ghana’s economic growth: which policy is more potent. International Journal of Empirical Finance, 3(2), pp.61-75.

Holston, K., Laubach, T. and Williams, J.C., 2017. Measuring the natural rate of interest: International trends and determinants. Journal of International Economics, 108, pp.S59-S75.

Imleesh, R.M., Yanto, H. and Prajanti, S.D.W., 2017. The impact of macroeconomic indicators on economic growth in Indonesia, Malaysia and Singapore. Journal of Economic Education, 6(1), pp.19-28.

Kasidi, F. and Mwakanemela, K., 2013. Impact of inflation on economic growth: A case study of Tanzania.

Karahan, Ö. and Yılgör, M., 2017. The Causal Relationship between Inflation and Interest Rate in Turkey‖. European Financial Systems, 2017, p.309.

Keynes, J.M., 1936. The general theory of interest, employment and money. The Economic Journal, 46(182), pp.238-253.

Kurihara, Y., 2013. Does adoption of inflation targeting reduce exchange rate volatility and enhance economic growth. Journal of world economic research, 2(6), pp.104-109.

Mavikela, N., Mhaka, S. and Phiri, A., 2019. The inflation-growth relationship in SSA inflation-targeting countries. Studia Universitatis Babes-Bolyai Oeconomica, 64(2), pp.84-102.

Mothuti, G. and Phiri, A., 2018. Inflation-growth nexus in Botswana: Can lower inflation really spur growth in the country?. Global Economy Journal, 18(4), p.20180045.

Njimanted, F.G., Akume, D. and Mukete, E.M., 2016. The impact of key monetary variables on the economic growth of the CEMAC Zone. Expert Journal of Economics, 4(2), pp.54-67.

Olowofeso, E.O., Adeleke, A.O. and Udoji, A.O., 2015. Impact of private sector credit on economic growth in Nigeria. CBN Journal of Applied Statistics, 6(2), pp.81-101.

Phiri, A., 2012. Threshold effects and inflation persistence in South Africa. Journal of Financial Economic Policy, 4(3), pp.247-269.

Pradhan, R.P., Arvin, M.B. and Bahmani, S., 2015. Causal nexus between economic growth, inflation, and stock market development: The case of OECD countries. Global Finance Journal, 27, pp.98-111.

Salami, F.K., 2018. Effect of interest rate on economic growth: Swaziland as a case study. J. Bus. Fin. Aff, 7(3), pp.1-5.

Sattarov, K. (2011). Inflation and Economic Growth. Analyzing the Threshold Level of Inflation.: Case Study of Finland, 1980-2010. Master Thesis, 15 ECTS. Universitet UMEA.

Seleteng, M., Bittencourt, M. and Van Eyden, R., 2013. Non-linearities in inflation–growth nexus in the SADC region: A panel smooth transition regression approach. Economic Modelling, 30, pp.149-156.

Sindano, A.N., 2014. Inflation and economic growth: an estimate of an optimal level of inflation in Namibia (Doctoral dissertation).

Southern African Customs Union (SACU)., 2017. Implementing a Common Agenda towards Regional Integration in Southern Africa. Annual Report.

Southern African Customs Union, 2018. Annual Report. Stawska, J., Central bank interest rates, inflation and economic growth in light of inflation targeting strategy in Poland.

Taylor, J.B., 1993, December. Discretion versus policy rules in practice. In Carnegie-Rochester conference series on public policy (Vol. 39, pp. 195-214). North-Holland.

Thamae, R.I. and Mohapi, M.J., 2014. Modelling inflation in Lesotho: a cointegration analysis. African Journal of Business and Economic Research, 9(2_3), pp.117-132.

Thanh, S.D., 2015. Threshold effects of inflation on growth in the ASEAN-5 countries: A Panel Smooth Transition Regression approach. Journal of Economics, Finance and Administrative Science, 20(38), pp.41-48.

Vermeulen, C., 2015. Inflation, growth and employment in South Africa: Trends and trade-offs. Economic Research Southern Africa (ERSA) Working Paper, 547.

World Bank Group. 2018. Macro Poverty Outlook: Country by Country Analysis and Projections for Developing World. Southern African Customs Union.

Yüksel, S. and Adalı, Z., 2017. Determining influencing factors of unemployment in Turkey with MARS method.