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Threshold effects and inflation persistence in South Africa

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  • Andrew Phiri

Abstract

Purpose – The purpose of this paper is to evaluate threshold effects in the persistence of South African aggregate inflation data. Design/methodology/approach – The conventional approach for assessing the degree of persistence within an inflation process is via its integration properties. This study makes use of univariate threshold autoregressive (TAR) models and associated unit root testing procedures to investigate the integration properties of the inflation data. Out-of-sample forecasts are further performed for the TAR models and their linear counterparts. Findings – The empirical results confirm threshold effects in the persistence of all employed aggregated measures of inflation, whereas such asymmetric effects are ambiguous for disaggregated inflation measures. None of the observed series is found to be stationary in their levels. The out-of-sample forecasts for all TAR models outperform their linear counterparts. Practical implications – Given the scope of the study, the empirical analysis provides insight with concern to the performance of inflation subsequent to the adoption of the inflation target regime in South Africa. Of particular interest are the low persistence levels observed at inflation rates of below 4.7 and 4.4 percent for core and CPI inflation, respectively, as both these aggregated measures of inflation play an essential role in guiding monetary policy conduct within the economy. The overall findings imply that on an aggregate level, the South African Reserve Bank's (SARB's) current inflation target of 3-6 percent encompasses a non-stationary inflation range and thus proves to be restrictive on monetary policy conduct. Originality/value – The paper fills in an important gap in the academic literature by evaluating asymmetric effects in the integration properties of inflation, at both aggregated and disaggregated levels, for the exclusive case of South Africa. JEL classification: C22, C2, E31, E3, E52, E5

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

Volume (Year): 4 (2012)
Issue (Month): 3 (August)
Pages: 247-269

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Handle: RePEc:eme:jfeppp:v:4:y:2012:i:3:p:247-269

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Related research

Keywords: Business fluctuations and cycles; Central banking; Credit; Deflation; Inflation; Macroeconomics; Mathematical and quantitative methods; Monetary economics; Monetary policy; Money supply; Single equation models; Single variables; South Africa; Time-series models;

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References

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Citations

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Cited by:
  1. Phiri, Andrew, 2014. "Purchasing power parity (PPP) between South Africa and her main currency exchange partners: Evidence from asymmetric unit root tests and threshold co-integration analysis," MPRA Paper 53659, University Library of Munich, Germany.
  2. Phiri, Andrew & Nyoni, Botha, 2014. "The electricity-growth nexus in South Africa: Evidence from asymmetric co-integration and co-feature analysis," MPRA Paper 56145, University Library of Munich, Germany.

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