Inflation, inflation uncertainty and economic growth nexus: an impact study of South Africa

Abstract

This study empirically examines the inflation, inflation uncertainty and economic growth nexus in South Africa using quarterly data for the period 1961Q1-2019Q4. The study employed the Autoregressive Distributed Lag (ARDL) bounds-testing approach. Literature has recorded a number of studies on the relationship between inflation and economic growth which yielded different conclusions. Studies on the South African economy omit the joint impact of inflation and inflation uncertainty on economic growth. This study enhances literature by bridging this gap. The empirical findings from the study illustrate that, in South Africa, inflation harms economic growth in both the short- and long-run. Inflation uncertainty is negatively related to economic growth in the short-run but lacks any significant relationship with economic growth in the long-run, which is an indication that inflation uncertainty is a short-run phenomenon in South Africa. Accordingly, the study recommends that the South African Reserve Bank maintains policies that promote price stability, such as inflation targeting, to provide a conducive environment for growth. It should also be stressed that price stability is a necessary but not sufficient condition for growth, hence the need for government to engage macroeconomic policies to promote economic growth.