The relationship between inflation, inflation uncertainty, and economic growth in South Africa

M.Comm. (Financial Economics)This dissertation examines the relationship between inflation, inflation uncertainty, and economic growth using quarterly data for South Africa covering the period 1960-2012. Inflation uncertainty is estimated using the Generalized Autoregressive Conditional Heteroscedasticity modelling framework. Granger methods are employed in order to investigate the interaction between inflation, inflation uncertainty, and economic growth. The presence of structural change is investigated through dummy variables representing changes in monetary policy regime. No evidence is found of any significant structural change in either inflation or inflation uncertainty. Granger results indicate that inflation uncertainty has a negative impact on inflation, supporting Holland’s (1995) argument of stabilising central bank behaviour. Conversely, there is evidence that high inflation leads to elevated inflation uncertainty, in accordance with Friedman’s (1977) hypothesis. Inflation uncertainty does not have a significant impact on economic growth in South Africa. However, inflation does have an adverse effect on economic growth, whilst economic growth exerts a positive impact on the rate of inflation. Lastly, economic growth does not have any meaningful effect on inflation uncertainty