An Inquisition into Bivariate Threshold Effects in The Inflation-Growth Correlation: Evaluating South Africa’s Macroeconomic Objectives

Phiri, Andrew (2013): An Inquisition into Bivariate Threshold Effects in The Inflation-Growth Correlation: Evaluating South Africa’s Macroeconomic Objectives.

Abstract

Is the SARB’s inflation target of 3-6% compatible with the 6% economic growth objective set by ASGISA? Estimations of inflation-growth bivariate Threshold Vector Autoregressive with corresponding bivariate Threshold Vector Error Correction (BTVEC-BTVAR) econometric models for sub-periods coupled with the South African inflation-growth experience between 1960 and 2010; suggest on optimal inflation-growth combinations for South African data presenting a two-fold proposition. Firstly, for the performance of economic growth to improve so it coincides with the 6% target objective as defined by ASGISA, may require the sustainment of an inflation rate of below 3.08%. Secondly, given the current economic environment with inflation averages of above 3.08% and economic growth rates of below 5.58%, lower inflation rates are to be best pursued through the attainment of higher economic growth rates. Consequentially, the overall implication of the study offers support in favour of a lower, ‘close-to-zero’ inflation target as a means of ensuring improved macroeconomic performance within the economy, while simultaneously contending that it would prove beneficial for stabilization economic policies to be devised such that these low levels of inflation are attained through higher economic growth rates.

• Item Type: MPRA Paper
• Language: English
• Keywords: Macroeconomic Policy; Economic Growth; Inflation; Thresholds, South Africa
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General

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