The relationship between inflation and financial development in South Africa

This study examined the relationship between inflation and financial development in South Africa using quarterly data (2005–2016). The study assessed whether theoretical and empirical propositions can be supported in South Africa. Co-integration tests utilising ARDL bounds testing method were employed to examine if there is a relationship between the variables of interest. As a proxy of financial sector development, stock market capitalisation and bank credit to the private sector were employed. Other variables that affect financial development such as money supply, interest rates, Gross Domestic Product, trade openness and net interest margin were also included in the model. The results of the study indicate that there exists a negative relationship between inflation and stock market capitalisation. Bank credit to the private sector showed a positive relationship with inflation both in the short run and long run