Is Low Inflation a Precondition for Faster Growth? The Case of South Africa
In a recent article, Weeks (1999) identifies excessively high real interest rates as one of the reasons why the South African government's GEAR (Growth, Employment and Redistribution) programme has thus far been unsuccessful. This paper examines a related issue, namely whether inflation, at any given level, is always harmful to growth. The methodology employed presents a departure from standard time series case studies. In an attempt to study the costs and benefits of inflation, South Africa's inflationary experience over the last four decades is divided into four inflationary episodes. The empirical results suggest that inflation within the single-digit zone may beneficial to growth, while inflation in the double-digit zone appears to impose costs in terms of slower growth. However, further results indicate that even during periods when deflationary policy yielded growth benefits as a result of a more stable economic environment, the costs of deflation outweighed the benefits.
|Date of creation:||Oct 2000|
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