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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.

Suggested Citation

  • Andrew Phiri, 2012. "Threshold effects and inflation persistence in South Africa," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(3), pages 247-269, July.
  • Handle: RePEc:eme:jfeppp:v:4:y:2012:i:3:p:247-269
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kolisi, Nwabisa & Phiri, Andrew, 2017. "Changes in the relationship between interest rates and housing prices in South Africa around the 2007 financial crisis," MPRA Paper 80173, University Library of Munich, Germany.
    2. Andrew Phiri, 2016. "Inflation persistence and monetary policy in South Africa: is the 3% to 6% inflation target too persistent?," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 8(2), pages 111-124.
    3. Nomahlubi Mavikela & Simba Mhaka & Andrew Phiri, 2018. "The inflation-growth relationship in SSA inflation targeting countries," Working Papers 1801, Department of Economics, Nelson Mandela University, revised Jan 2018.
    4. 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.
    5. Andrew Phiri, 2017. "Nonlinear adjustment effects in the purchasing power parity," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 60(2), pages 14-38.
    6. Andrew Phiri, 2016. "Inflation persistence in African countries: Does inflation targeting matter?," Economics and Business Letters, Oviedo University Press, vol. 5(3), pages 65-71.
    7. Phiri, Andrew, 2017. "Inflation persistence in BRICS countries: A quantile autoregressive (QAR) model," MPRA Paper 79956, University Library of Munich, Germany.
    8. Andrew Phiri, 2018. "Inflation persistence in BRICS countries: A quantile autoregressive (QAR) approach," Business and Economic Horizons (BEH), Prague Development Center, vol. 14(1), pages 97-104, January.
    9. Phiri, Andrew, 2016. "Asymmetric pass-through effects from monetary policy to housing prices in South Africa," MPRA Paper 70258, University Library of Munich, Germany.
    10. 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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