The determinants of inflation in South Africa: An econometric analysis
AbstractThis study seeks to explain the dynamics of inflation in South Africa. It was motivated by the recent monetary policy shift towards inflation targeting and the authorities’ stated objective of reducing inflation to a level commensurate with that of its trading partners. In the study, we develop a model that relates domestic inflation in South Africa to money market, labour market and foreign exchange market conditions. We demonstrate that inflation in South Africa is largely a structural phenomenon. In the short run, there is a positive correlation between labour costs, broad money supply and domestic inflation. An appreciation of the rand or an increase in the nominal effective exchange rate will lower domestic inflation in South Africa. In the long run, rising labour costs contribute significantly to inflation. An increase in the nominal interest rate, the effect of which is insignificant in the short run, will slightly reduce inflation in the long run. On the other hand, an increase in the broad money supply will contribute to domestic inflation in the long run. It appears as if purchasing power parity exists between South Africa and its major trading partners. The predominant source of variation in domestic inflation’s forecast errors is own shocks. Innovations from labour costs and the nominal effective exchange rate are also important sources.The largely structural nature of inflation in South Africa, coupled with the reality that the monetary authorities have limited control over its main determinants, suggests that it will be difficult to achieve the objective of the inflation targeting regime, namely inflation parity with South Africa’s major trading partners.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by African Economic Research Consortium in its series Research Papers with number RP_143.
Length: 52 pages
Date of creation: Sep 2004
Date of revision:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (winston wachanga).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.