The impact of inflation on financial development in South Africa

Growing theoretical and empirical studies have predicted different influences that inflation has on financial development in different economies. This dissertation observes the impact South Africa’s inflation has on financial development over the period between 1990 and 2012. Monetary policy framework in South Africa has, to a greater extent, assisted in monitoring the movement of the consumer price index. Although inflation does affect financial sector performance, the study also looked into other variables that have an effect like private credit, money supply and gross domestic product. To test for stationarity to avoid spurious regression, the ADF test and the PP test were used. To determine the long- and short-run relationship, the Johansen Maximum Likelihood test and VECM models were used. Results of the study indicated that money supply and inflation have a negative effect on financial development. In addition, apart from money supply and inflation the findings revealed that private credit and gross domestic product play a significant part in financial sector performance. The study recommends that the South African Reserve Bank should keep the inflation rate within its target range (3-6percent). This would ensure price stability and restore investor confidence in the financial sector, which then improves financial sector development