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The determinants of inflation in South Africa: An econometric analysis

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  • Oludele Akinloye Akinboade
  • Franz Krige Siebrits
  • Elizabeth Wambach Niedermeier

Abstract

This 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.

Suggested Citation

  • Oludele Akinloye Akinboade & Franz Krige Siebrits & Elizabeth Wambach Niedermeier, 2004. "The determinants of inflation in South Africa: An econometric analysis," Research Papers RP_143, African Economic Research Consortium.
  • Handle: RePEc:aer:rpaper:rp_143
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    File URL: http://www.aercafrica.org/documents/RP143.pdf
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    Cited by:

    1. S. Adnan & H.A.S. BUKHARI & Safdar Ullah KHAN, 2008. "Does Volatility In Government Borrowing Leads To Higher Inflation? Evidence From Pakistan," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(3(5)_Fall), pages 187-202.
    2. Khieu Van, Hoang, 2014. "Budget deficit, money growth and inflation: Empirical evidence from Vietnam," MPRA Paper 54488, University Library of Munich, Germany, revised 12 Feb 2014.

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