An analysis of monetary policy and its effect on inflation and economic growth in South Africa
Van Wyngaard, D.
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Emerging market economies, such as South Africa, frequently struggle to maintain a stable and economically viable inflation rate due to economic factors of a cost-push and structural nature. These factors not only influence inflation within the economy, but also the efficacy of monetary policy in its pursuit of its many goals. The South African economy has thus long been a victim of volatile inflation, low growth and low employment creation, which are all matters that form part of the mandate of monetary policy. This could be because of the indirect measures that have been used by the South African Reserve Bank (SARB) to control both money supply as well as inflation in the economy have become increasingly inefficient over time. Therefore, the primary objective of the study was to analyse the efficiency of monetary policy in South Africa, in terms of reaching its goals as set out by the mandate of the SARB regarding inflation, employment and economic growth and in having done so, investigating the existence of cost-push and structural inflationary factors within the South African economy. This study examined the effects of official interest rate, broad money supply, the exchange rate, government debt and government revenue on CPI inflation, as well as on the efficiency of monetary policy in reaching its objectives. It thus determines the long- and short-run relationships between the aforementioned variables from 2001 to 2017. The study further establishes the causal direction between the variables under study. Therefore, the study employed various econometric models inclusive of the Autoregressive Distributed Lag (ARDL) model, the standard ARDL bounds test to cointegration, the Error Correction Model and Toda-Yamamoto granger noncausality test. Furthermore, the study made use of a quantitative research design and included time series, macro-economic variables such as gross domestic product, employment, the repo rate, broad money supply, the nominal effective exchange rate, government debt, government revenue and consumer price inflation, quarterly from 2001 to 2017. These variables were used in two separate econometric models, one of which had consumer price inflation as its dependent variable, with all other variables as independent. The other combined gross domestic product, employment, consumer price inflation to create the Monetary Policy Success Index or MPSI. By employing the unit root and stationarity tests, the study found that all the variables under study comprised of variables that are stationary at either I(0) or I(1), with none of the variables stationary at I(2). This allowed the ARDL model to be used, which produced results that indicated that the South African economy is consistent with cost-push and structural inflation, which leads to inefficiency in the achievement of the objectives of monetary policy as it takes roughly 5.34 quarters for changes in monetary policy to affect the economy. Both long- and short-run relationships exist between independent and dependent variables. The study further performed the Toda-Yamamoto Granger non-causality test and found that variables such as government revenue and government debt have a short-run impact on consumer price inflation, supporting the existence of structural and cost-push inflation in the South African economy. Equally as important, the results of the residual and stability diagnostic tests, which were performed on both models of the study proved that the study models are normally distributed, none are serially correlated nor heteroscedastic and are both stable. This, in turn, ensured that the results of the study are not inaccurate or misleading.