3. Electronic Theses and Dissertations (ETDs) - All submissions
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Item Inflation, growth and monetory policy in South Africa: application of non-linear models(2018) Tshuma, Mthokozisi MncedisiThis thesis intends to shed new light on the conduct of South Africa’s central bank behavior. The thesis analyses the monetary policy conduct and the use of non-linear rules in South Africa. Furthermore, it scrutinizes the applicability of non-linear rules in characterizing the monetary policy behaviour in South Africa. Over and above the introductory chapter, the thesis comprises five main independent chapters, namely: chapters 2, 3, 4, 5, and 6. Chapter 7 cover conclusions. Chapter 21 determines the applicability of a nonlinear Taylor rule in characterizing the monetary policy behavior of the South African Reserve Bank (SARB), using a logistic smooth transition regression approach. The evidence suggests the nonlinear Taylor rule is the most appropriate model to describe the monetary policy conduct of the South African Reserve Bank. In Chapter 3, nonlinear models are used to analyse the nonlinear relationship among monetary policy, economic activity and financial instability, which is an extension of the previous chapter (Chapter 2). Two models (threshold regression and smooth transition) were used to analyse the role of financial condition in the interest setting by monetary authorities. The findings indicate that there is an inflation threshold level of 6.2 percent above, which the central bank adjusts its interest rate to maintain price stability. The results provide enough evidence that the monetary policy followed by the South Africa Reserve Bank (SARB) can be described by a nonlinear Taylor rule. The thesis extends the analysis to determine the differential effects of inflation on GDP growth based on the estimated inflation. The purpose is to show that inflation is detrimental to economic growth at elevated levels. As a consequence, chapter 4 identifies the threshold effect of inflation on economic growth in South Africa. The estimated threshold model reveals that in South Africa, there is a non-linear relationship between inflation and economic growth. This implies that above the threshold level, inflation has a negative statistically significant effect on economic growth. These results may help policymakers in maintaining low inflation, which is below the threshold level to mitigate its negative effect on economic growth. Chapter 5 examines the effect of inflation variation on financial depth-growth relationship using a smooth transition regression model. The findings show that financial development and economic growth are non-linearly related with an increase in inflation beyond the threshold (at 4.3 percent) negatively impacting on economic growth. Therefore, financial development has a positive impact on economic growth when inflation is below the threshold of 4.3 percent, though above the threshold there is a negative relationship between financial development and economic growth. Chapter 6 examines the exchange rate pass through effect to headline CPI inflation, producer price inflation and import price inflation in South Africa. The analysis of exchange pass through effect is relevant in the context of South Africa as decisions of monetary policy makers take into account changes in domestic prices emanating from exchange rate adjustments. For the purposes of analysis, this chapter estimates a Threshold Vector Autoregression (TVAR) to capture switches between the low and high inflation regimes implied by the theoretical literature with inflation rate as a transition variable. Using nonlinear impulse response functions, this chapter evaluate the dynamics implied by the threshold model. Findings reveal that prices (headline CPI inflation, producer price inflation and import price inflation) react strongly to a positive one unit exchange rate shock both below and above the threshold level of the inflation rate.Item A crosscountry study of asymmetric preference: the case of Inflation and employment targeting(2018) Mohlakoane, RamilaneItem Inflation dynamics in South Africa(2016) Leshoro, Temitope LydiaThe design and implementation of the monetary policy in South Africa has been based on the idea of a trade-off between inflation and output growth. However, there is no consensus among empirical investigations on the existence of Phillips curve in the present times. While the South African Reserve Bank (SARB) has instrument independence, it does not have goal independence, which implies that there is coordination between the monetary policy and other macroeconomic policies. Thus, if the SARB objectives are in line with the other policy objectives, there should be a relationship between monetary variables and real variables. This therefore shows that in the long-run, monetary policy cannot single-handedly bring about both sustained economic growth and employment creation (SARB, 2014). Thus this study explored inflation dynamics in South Africa by using the Hybrid new Keynesian Phillips curve (HNKPC) and the augmented Gordon’s models. The study firstly estimated the Hybrid new Keynesian Phillips curve model with a view to determine whether Phillips curve exists and ascertain whether the backward-looking or forward-looking components drive inflation dynamics in South Africa using OLS and GMM estimation techniques. The results show that the Phillips curve does not exist in South Africa using various measures of demand-side variable. These findings are robust across estimation methodologies as well as different measurements of inflation expectations and data frequency. While the findings indicated that economic agents in South Africa are both rational and adaptive in predicting inflation, the results clearly showed the dominance of forward looking component over the backward looking element in driving inflation. Secondly, given the focus of the South African monetary authority in maintaining stable inflation rates and the fact that monetary policy need to go hand-in-hand with other policies in order to ensure stable inflation and economic growth (Gruen, Pagan and Thompson, 1999), this study considered the expanded Gordon’s model with a particular focus on how fiscal policy determines the inflation process in South Africa. The purpose of the Gordon’s chapter is to verify the existence or non-existence of Phillips curve in an expanded model, within the context of an augmented “triangle” model while including the monetarist and fiscal side variables, thereby checking whether the PC relationship of recent studies is robust to model specification. Thus, the augmented Gordon’s model was estimated using a holistic approach of including the fiscalist, monetarist and the structuralist schools of thought, using the Vector autoregressive (VAR), vector error correction model (VECM) and innovation accounting techniques. The results confirm the non-existence of PC whereby output growth maintained a negative relationship with inflation rate, signifying no trade-off despite the expanded specification, while the results from output-gap model are inconclusive. Further results showed that the demand-side, fiscal factors and some of the structural variables contribute more to the inflation dynamics in South Africa. Thus the changes in inflation rate are as a result of changes in output growth, government deficit, electricity price and exchange rate. The results confirmed that the Fiscal Theory of the Price Level (FTPL) applies to the South African economy, whereby not only monetary policies should be considered in controlling inflation, but also fiscal policies. On the other hand, the importance of the determinants of inflation rate is not sufficient in observing the inflation dynamics in South Africa; therefore, this study concluded by investigating the level at which inflation becomes detrimental to output growth. In the context of the low levels of economic growth and high levels of unemployment in South Africa, the study analysed the output growth implications of the inflation targeting monetary policy of the South African Reserve Bank that targets an inflation band between three and six percent. Using the Threshold Autoregressive (TAR) and the Sample Splitting Threshold Regression (SSTR) techniques, this study investigated the nonlinear inflation-growth nexus in South Africa with the purpose of identifying the inflation rate band that optimize output growth. The results showed that South Africa is able to accommodate a higher level of inflation beyond the current inflation target band by increasing the band to between seven and nine percent in order to enhance output growth. Our findings support the argument of studies that indicate that moderately higher inflation rate will not be harmful to the economy.Item Food price inflation and the poor(2016) Ngidi, BandileFood price inflation has been an important subject of debate internationally since 2008. This sharp increase in food prices experienced during 2008 lead to intense research into the causes, dynamics and responses to this particular instance of food price inflation. The international literature attributed food price inflation to such factors as climate change, increases in energy costs and speculative activity in financial markets for agricultural commodities. This research report undertakes a review of the measurement of food price inflation in South Africa, broadly assessing how it is to be linked to the poor in South Africa. The research report focuses on the work of institutions concerned with the measurement of food price inflation in South Africa. Different methodologies of identifying foods as food staples are looked at. Food prices and trends are analysed using CPI data from January 2008 until October 2008, using selected consumer price index series from Statistics South Africa. The research report finds that the institutions studied show evidence of that higher food price inflation is correlated with demographic markers of poverty, although the traditional measure, the CPI, does not suggests that this is very extensive. This, it is argued, is due to the calculation methodologies used in the published CPI, and the data period. The research report then ends with an overview of the political economy of food in South Africa, thereby makes recommendations as to why the measurement of food price inflation is important for the poor.