THE INFLATION-GROWTH RELATIONSHIP IN SSA INFLATION-TARGETING COUNTRIES

Nomahlubi MAVIKELA; Simba MHAKA; Andrew PHIRI

doi:10.2478/subboec-2019-0011

Authors

Nomahlubi MAVIKELA Nelson Mandela University, South Africa
Simba MHAKA Nelson Mandela University, South Africa
Andrew PHIRI Nelson Mandela University, South Africa https://orcid.org/0000-0003-1775-3546

DOI:

https://doi.org/10.2478/subboec-2019-0011

Keywords:

Inflation; Economic Growth; quantile regression; Inflation targeting; South Africa; Ghana; Sub-Saharan Africa (SSA).

Abstract

This paper investigates the relationship between inflation and economic growth for South Africa and Ghana using quarterly empirical data collected from 2001 to 2016 applied to the quantile regression method. For our full sample estimates we find that inflation is positively related with growth in Ghana at high inflation levels whilst inflation in South Africa exerts its least adverse effects at high inflation levels. However, when particularly focusing on the post-crisis period, we find inflation exerts negative effects at all levels of inflation for both countries with inflation having its least adverse effects at high levels for Ghana and at moderate levels for South Arica. Based on these findings bear important implications for inflation targeting frameworks adopted by Central Banks in both countries.

JEL Classification: C32, C51, E31, E52, O40;

References

Adu G., Marbuah G. and Mensah J. (2013) “Financial development and economic growth in Ghana: Does the measure of financial development matter?”, Review of Development Finance, 3, 192-203.

Adusei M. (2012) “The inflation-growth nexus: Estimating a threshold effect for South Africa”, Journal of Money, Investment and Banking, 26, 87-93.

Adusei M. (2013) “Financial development and economic growth: Evidence from Ghana”, The International Journal of Business and Finance Research, 7(5), 61-76.

Ahiakpor F. and Akapare I. (2014) “Short-run and long-run inflation and economic growth in Ghana”, Ghana Journal of Development Studies, 11(2), 32-49.

Ahortor C., Adenekan A. and Ohemeng W. (2010) “An estimate of inflation threshold in the WAMZ: The case of Ghana and Nigeria”, Journal of Monetary and Economic Integration, 11(2), 150-201.

Ayisi R., Minlah M., Adu J. and Sam V. (2013) “Inflation and growth nexus in Ghana: The inflation threshold for Ghana re-visited”, Retrieved from: http://dx.doi.org/10.2139/ssrn.2329391

Behera J. and Mishra A. (2016) “Inflation and economic growth nexus in BRICS: Evidence from ARDL bound testing approach”, Asian Journal of Economic Modelling, 4(1), 1-17.

Bick A. (2010) “Threshold effects of inflation on economic growth in developing countries”, Economic Letters, 108, 126-129.

Bittencourt M., van Eyden R. and Seleteng M. (2015), “Inflation and growth: Evidence from South African Development Community, South African Journal of Economics, 83(3), 411-424.

Bose N. (2002) “Inflation, the credit market and economic growth”, Oxford Economic Papers, 54(3), 412-434.

Bruno M. and Easterly W. (1998) “Inflation crisis and long-run growth”, Journal of Monetary Economics, 41(1), 3-26.

Burdekin R., Denzau A., Keil M., Sitthiyot T. and Willett T. (2004) “When does inflation hurt economic growth? Different nonlinearities for different economies”, Journal of Macroeconomics, 26, 519-532.

Chipaumire G., Ngirande H., Method M. and Ruswa Y. (2014) “The impact of government spending on economic growth: Case South Africa”, Mediterranean Journal of Social Sciences, 5(1), 109-118.

Chu A., Cozzi G., Furukawa Y. and Liao C. (2017) “Inflation and economic growth in a Schumpeterian model with endogenous entry of heterogeneous firms”, European Economic Review, 98, 392-409.

Cooley T. and Hansen G. (1989) “The inflation tax in a real business cycle model”, American Economic Review, 79, 733-748.

Danladi J. (2013) “Inflation and sustainable output performance in the West African sub-region: The threshold effect”, American Journal of Economics, 3(6), 252-259.

Domar D. (1946) “Capital expansion, rate of growth and employment”, Econometrica, 14(2), 137-147.

Drukker D., Gomis-Porqueras P. and Hernandez-Verme P. (2005) “Threshold effects in the relationship between inflation and growth: A new panel data approach”, MPRA Working Paper No. 38225, February.

Eggoh J. (2012) “Inflation effects on finance-growth link: A panel smooth threshold approach”, International Economic Journal, 16(4), 711-725.

Enu P., Attah-Obeng P. and Hagan E. (2013) “The relationship between GDP growth rate and inflationary rate in Ghana: An elementary statistical approach”, Academic Research International, 4(5), 310-318.

Espinoza R., Leon H. and Prasad A. (2010) “Estimating the inflation-growth nexus – A smooth transition model”, IMF Working Papers No. 10-76, March.

Fischer S. (1993) “The role of macroeconomic factors in growth”, Monetary Economics, 32(3), 485-511.

Frenkel J.A. and Rodriguez C.A. (1975) "Wealth effects and the dynamics of inflation: comment", Journal of Money, Credit and Banking, 7(2), 259-68.

Frimpong J. and Oteng-Abayie E. (2010) “When is inflation harmful? Estimating the threshold effect for Ghana”, American Journal of Economics and Business Administration, 2(3), 232-239.

Ghosh A. and Philips S. (1998) “Warning: Inflation may be harmful to your growth”, IMF Staff Papers, 45(4), 672-710.

Gillman M. and Kejak M. (2004) “Inflation and balanced-path growth with alternative payment mechanisms”, The Economic Journal, 115(500), 247-270.

Gokal V. and Hanif S. (2004) "Relationship between inflation and growth", Reserve Bank of Fiji, Working Paper No. 2004/04.

Greenwood J. and Huffman G. (1987) “A dynamic equilibrium model of inflation and unemployment”, Journal of Monetary Economics, 19(2), 203-228.

Gylfason T. and Herbertsson T. (2001), “Does inflation matter for growth?”, Japan and the World Economy, 13(4), 405-428.

Harrod R. (1939) “As essay in dynamic theory”, The Economic Journal, 49(193), 14-33.

Hodge D. (2006) “Inflation and growth in South Africa”, Cambridge Journal of Economics, 30, 163-180.

Huybens E. and Smith B. (1998) “Financial market frictions, monetary policy and capital accumulation in a small pone economy”, Journal of Economic Theory, 81, 353-400.

Ibarra, R., and Trupkin, D. (2016) “Re-examining the relationship between inflation and growth: Do institutions matter in developing countries”, Economic Modelling, 52, 332-351.

Iyke B. and Odhiambo N. (2017) “Inflation thresholds, financial development and economic growth: New evidence from two West African countries”, Global Economy Journal, 13(1), 1-11.

Jude E. (2010) “Financial development and growth: A panel smooth regression approach”, Journal of Economic Development, 35(1), 15-33.

Kabundi A. and Mbelu A. (2016), “Has the exchange rate pass-through changed in South Africa?”, ERSA Working Paper No. 649, November.

Khan M. and Senhadji A. (2001), “Threshold effects in the relationship between inflation and growth”, IMF Staff Papers, 48, 1-21.

Khabo V. and Harmse C. (2005) “The impact of monetary policy on economic growth of a small and open economy: The case of South Africa”, South African Journal of Economic and Management Sciences, 8(3), 348-362.

Koenker R. and Bassett G. (1978) “Regression quantiles”, Econometrica, 46(1), 33-50.

Kovanen A. (2011) “Monetary policy transmission in Ghana: Does interest rate channel work?”, IMF Working Paper No. 11/275, November.

Kremer S., Bick A. and Nautz D. (2013), “Inflation and growth: New evidence from a dynamic panel threshold analysis”, Empirical Economics, 44, 861-878.

Leshoro T. (2012) “Estimating the inflation threshold for South Africa”, ERSA Working Paper No. 285, May.

Li M. (2006), “Inflation and economic growth: Threshold effects and transmission mechanism”, Department of Economics, University of Alberta, 8-14.

Lucas R. (1982) “Interest rates and currency prices in a two model country”, Journal of Monetary Economics, 10(3), 335-359.

Lucas R. and Stokey (1987), “Money and interest in a cash-in-advance economy”, Econometrica, 55(3), 491-513.

Mahawiya S. (2015) “Financial sector development and threshold effect of inflation in ECOWAS and SADC: A panel smooth transition regression approach”, ERSA Working Paper No. 539, August.

Manamperi N. (2014) “The short and long-run dynamics between inflation and economic growth in BRICS”, Applied Economic Letters, 21(2), 140-145.

Mankiw N.G., Romer D. and Weil D.N. (1992) “A contribution to the empirics of economic growth”, The Quarterly Journal of Economics”, 107(2), 407-437.

Marbuah G. (2011) “On the inflation-growth nexus: Testing for optimal inflation on output growth”, West African Journal of Monetary and Economic Integration, 11(2), 54-82.

Mignon V. and Villavicencio A. (2011) “On the impact of inflation on output growth: Does the level of inflation matter?”, Journal of Macroeconomics, 33(3), 455-464.

Mireku P. (2012), “Inflation and growth: Estimation of threshold inflation for Ghana”, Bank of Ghana Working Paper, July.

Mundell R. (1963) “Inflation and real interest rate”, The Journal of Political Economy, 71(3), 208-283.

Munyeka W. (2014) “The relationship between economic growth and inflation in the South African economy”, Mediterranean Journal of Social Sciences, 5(15), 119-129.

Ndoricimpa A. (2017) “Threshold effects of inflation on economic growth in Africa: Evidence from a dynamic panel threshold regression approach”, African Development Bank Working Paper No. 249, January.

Nell K. (2000) “Is low inflation a precondition for faster growth? The case of South Africa”, Department of Economics Discussion Paper, University of Kent, No. 00-11, October.

Nketiah-Amponsah E. (2009) “Public spending and economic growth: Evidence from Ghana (1970-2004)”, Development Southern Africa, 26(3), 477-497.

Odhiambo N. (2013) “Inflation and economic growth in South Africa: An empirical investigation”, Economics, Management and Financial Markets, 8, 27-41.

Oikawa K. and Ueda K. (2018), “The optimal inflation rate under Schumpeterian growth”, Journal of Monetary Economics, 100, 114-125.

Omay T., van Eyden R. and Gupta R. (2018) “Inflation-growth nexus: Evidence from a pooled CCE multiple regime panel smooth transition model”, Empirical Economics, 54, 913-944.

Phiri A. (2010) “At what level is inflation least detrimental towards finance-growth activity in South Africa?”, Journal of Sustainable Development in Africa, 12(6), 354-364.

Phiri A. (2012) “Threshold effects and inflation persistence in South Africa”, Journal of Financial Economic Policy, 4(3), 247-269.

Phiri A. (2013) “An inquisition into bivariate thresholds effects in the inflation-growth correlation: Evaluating South Africa’s macroeconomic objectives”, Business and Economic Horizons, 9(3), 1-11.

Phiri A. (2016a) “Inflation persistence and monetary policy in South Africa: Is the 3% to 6% inflation target too persistent?”, International Journal of Sustainable Economy, 8(2), 111-124.

Phiri A. (2016b) “Inflation persistence in African countries: Does inflation targeting matter?”, Economics and Business Letters, 5(3), 65-71.

Phiri A. (2016c) “Did the global financial crisis alter equilibrium adjustment dynamics between the US Feds rates and stock market volatility in the SSA region?”, Economics Bulletin, 36(2), 778-788.

Phiri A. (2017) “Changes in inflation persistence prior and subsequent to the global financial crisis: What are the implications for South Africa?”, Journal of Reviews on Global Economics, 6, 198-207.

Pollin R. and Zhu A. (2006) “Inflation and economic growth: A cross-country non-linear analysis”, Journal of Post Keynesian Economics, 28(4), 593-614.

Quartey P. (2010) “Price stability and the growth maximizing rate of inflation for Ghana”, Modern Economy, 1, 180-194.

Rousseau P. and Wachtel P. (2002) “Inflation threshold and the finance-growth nexus”, Journal of International Money and Finance, 21(6), 777-793.

Sarel M. (1996), “Nonlinear effects of inflation economic growth”, IMF Staff Papers, 43(1), 199-215.

Seleteng M., Bittencourt M. and van Eyden R. (2013) “Non-linearities in inflation-growth nexus in the SADC region: A panel smooth transition regression approach”, Economic Modelling, 30, 149-156.

Schumpeter J. (1912) “The theory of economic development: An inquiry into profits, capital, credit, interest and business cycles”, Harvard Press, Cambridge.

Sidrauski M. (1967) “Rational choice and patterns of economic growth in a monetary economy”, American Economic Review, 57(2), 534-544.

Solow R.M. (1965) "A contribution to the theory of economic growth", Quarterly Journal of Economics, 70(1), 65-94.

Stockman A. (1981) “Anticipated inflation and the capital stock in a cash-in-advance economy”, Journal of Monetary Economics, 8(3), 387-393.

Svensson L. (1985) “Money and asset prices in a cash-in-advance economy”, Journal of Political Economy, 93(5), 919-944.

Tobin J. (1965) “Money and economic growth”, Econometrica, 33(4), 671-684.

Vaona A. and Schiavo S. (2007) “Nonparametric and semiparametric evidence on the long-run effects of inflation on growth”, Economics Letters, 94, 452-458.