Macroeconomics and Monetary Economics - 2
Abstract
The total economy is affected by inflation which should be effectively controlled to support
economic growth. However, in recent years there has been evidence of inefficiencies of inflationary
control in South Africa as the country is faced with both structural and cost-push inflation in a low
growth economy. The objective of this study was to investigate whether these inflation types are
effectively controlled through the utilisation of interest rates and money supply by the South African
Reserve Bank (SARB). Secondary data from the SARB were collected for 69 quarters from 2000 Q1
to 2017 Q1. An autoregressive distributive lag model (ARDL) was used to analyse the data for longrun
co-integration while an error correction model (ECM) tested for short-run relationships. Variables
included the consumer price index (CPI), money supply, interest rate (repo rate), government
expenditure as well as trade openness. The results indicated that both long- and short-run relationships
exist between the variables. The study revealed that structural and cost-push inflation exists in South
Africa, making the current methods of monetary policy implementation less effective in controlling
inflation as well as having an impact on economic growth.
References
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South Africa. Journal of Policy Modelling, Vol. 35, No. 5, pp. 798-812.
Anari, A. & Kolari, J. (2016). Dynamics of interest and inflation rates. Journal of Empirical Finance,
Vol. 39, No. 1, pp. 129-144.
Ardakani, O.M.; Kishor, N.K. & Song, S. (2018). Re-evaluating the effectiveness of inflation targeting.
Journal of Economic Dynamics and Control, Vol. 90, No.1, pp. 76-97.
Atabay, R. (2016). The relationship between trade openness and inflation in Turkey. International
Journal of Research in Business & Social Science, Vol. 5, No. 3, pp. 137-145.
Aziakpono, M. & Wilson, M.K. (2015). Interest rate pass through, financial structure and monetary
policy in South Africa. African Finance Journal, Vol. 17, No. 1, pp. 67-90.
Barth, J.R. & Bennet, J.T. (1975). Cost-push versus demand-pull inflation: Some empirical evidence.
Journal of Money, Credit & Banking, Vol. 7, No. 3, pp. 391-397.
Coiran, Z. (2014). Monetary policy, inflation and the causal relation between the inflation rate and some
of the macroeconomic variables. Procedia Economics and Finance Vol. 16, No. 1, pp. 391-401.
Davis, S. (2017). Inflation targeting in South Africa. http://sharondavis.co.za/content/view/74 /32. Date
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de Jongh, J.J.; Meyer, N. & Meyer, D.F. (2016). Perceptions of local businesses on the employment tax
incentive act: The case of the Vaal Triangle Region. Journal of Contemporary Management, Vol. 13,
No. 1, pp. 409-432.
De Waal, A. & Van Eyden, R. (2014). Monetary policy and inflation in South Africa: a VECM
augmented with foreign variables. South African Journal of Economics, Vol. 82, No. 1, pp. 117-140.
Du Plessis, S. & Rietveld, M. (2013). Should inflation targeting be abandoned in favour of nominal
income targeting? Stellenbosch Economic Working Papers No. 12/13. Cape Town: Stellenbosch
University Press.
Du Plessis, S. (2015). Targeting core inflation in emerging-market economies. Economic Modelling,
Vol. 45, No. 1, pp. 53-68.
Fand, D. (1969). Keynesian monetary theories, stabilization policy, and the recent inflation. Journal of
Money, Credit & Banking, Vol. 1, No. 3, pp. 556-587.
Fedderke, J.W. & Schaling, E. (2005). Modelling inflation in South Africa: A multivariate cointegration
analysis. South African Journal of Economics, Vol. 73, No. 1, pp. 79-92.
Gali, J. (2015). Monetary policy, inflation, and the business cycle: An introduction to the New
Keynesian Framework and its Applications. New Jersey: Princeton University Press.
Gujarati, D.N. & Porter, D.C. 2008. Basic econometrics. 5th Ed. Boston: McGraw-Hill Irwin.
Guru, S. (2016). The structural theory of inflation – explained. Retrieved from http://www.your
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explained/37980, date: 08.10.2017.
Kabundi, A.; Schaling, E. & Some, M. (2015). Monetary policy and heterogeneous inflation
expectations in South Africa. Economic Modelling, Vol. 45, No. 1, pp. 109-117. Matemilola, B.T.;
Bany-Ariffin, A.N. & Muhtar, F.E. (2015). The impact of monetary policy on bank lending rate in
South Africa. Borsa Istanbul Review, Vol. 15, No. 1, pp. 53-59.
Mehrara, M.; Behzadi, M.S. & Razaei, S. (2016). The impact of government spending on inflation
through the inflationary environment, STR approach. World Scientific News, Vol. 37, No. 1, pp. 153-
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Mellet, A. (2012). A critical analysis of South African economic policy. Thesis – PhD. Vanderbijlpark:
NWU.
Mills, S. (2016). How to fix SA’s labour market. Retrieved from http://www.fin24.co.za/
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Mohr, P. & Fourie, L. (2011). Economics for South African students. Pretoria: Van Schaik Publishers.
Ntingi, A. (2015). Cut taxes to boost economy and reduce inflation. Retrieved from
https://www.iol.co.za/business-report/opinion/cut-taxes-to-boost-economy-and-reduce-inflation
2009843. date: 30.08.2017.
Pesaran, M.H. & Shin, Y. (1996). Cointegration and speed of convergence to equilibrium. Journal of
Econometrics, Vol. 71, No. 1, pp. 117-143.
Reichlin, L. & Baldwin, R. (2013). Is inflation targeting dead? London: Centre for Economic Policy
Research.
Riba, L. (2017). The relationship between tax and economic growth: A South African perspective.
Dissertation – M.Com. Cape Town: University of Cape Town.
SARB (South African Reserve Bank). (2017a). Monetary policy. Retrieved from
https://www.resbank.co.za /monetary policy/pages/monetarypolicy-home.aspx. date: 03.07. 2017.
SARB (South African Reserve Bank). (2017b). Current market rates. Retrieved from
https://www.resbank. co.za/fastsearch/pages/results.aspx?k=rates. date: 03.06 2017.
Sen, G.C. (2016). Structural inflation in the LDC’s. Retrieved from http://www.yourarticlelibrary.
com/macro-economics/inflation-macro-economics/structural-inflation-in-the-ldcs/40951 date: 08.10.
2017.
Stats SA (Statistics South Africa). (2017a). Interest rates: Historical data. Pretoria: Government
Printer.
Stats SA (Statistics South Africa). (2017b). Quarterly labour force survey: Quarter 4. Pretoria:
Government Printer.
Stats SA (Statistics South Africa). (2017c). Inflation rate: Historical data. Pretoria: Government
Printer.
Taylor, J.B. (2015). Inflation targeting in emerging markets: The global experience. Economic
Modelling, Vol. 45, No. 1, pp. 1-18.
Tinbergen, J. (1952). On the theory of economic policy. Amsterdam: Erasmus University Press.
Van Aardt, C. & Van Tonder, J. (2011). Optimal prime rate estimates using the Rudebusch method.
Pretoria: UNISA Press.
Van der Merwe, E.J. & Mollentze, S.L. (2010). Monetary economics in South Africa. 2nd Ed. Cape
Town: Oxford University Press.
Woodford, M. (2003). Interest and prices: Foundations of a theory of monetary policy. 2nd Ed. New
Jersey, NJ: Princeton University Press.
of Economics, Management & Trade, Vol. 3, No. 1, pp. 60-72.
Ahlgren, P.; Jarneving, B. & Rousseau, R. (2003). Requirements for a co-citation similarity measure,
with special reference to Pearson’s correlation coefficient. Journal of the American Society for
Information Science and Technology, Vol. 54, No. 6, pp. 550-560.
Akinboande, O.A.; Siebrits, F.K. & Wamback Niedemeier, E. (2004). The determinants of inflation in
South Africa: An econometric analysis. Nairobi: African Economic Research Consortium.
Amusa, K.; Gupta, R.; Karolia, S. & Simo-Kengne, B.D. (2013). The long-run impact of inflation in
South Africa. Journal of Policy Modelling, Vol. 35, No. 5, pp. 798-812.
Anari, A. & Kolari, J. (2016). Dynamics of interest and inflation rates. Journal of Empirical Finance,
Vol. 39, No. 1, pp. 129-144.
Ardakani, O.M.; Kishor, N.K. & Song, S. (2018). Re-evaluating the effectiveness of inflation targeting.
Journal of Economic Dynamics and Control, Vol. 90, No.1, pp. 76-97.
Atabay, R. (2016). The relationship between trade openness and inflation in Turkey. International
Journal of Research in Business & Social Science, Vol. 5, No. 3, pp. 137-145.
Aziakpono, M. & Wilson, M.K. (2015). Interest rate pass through, financial structure and monetary
policy in South Africa. African Finance Journal, Vol. 17, No. 1, pp. 67-90.
Barth, J.R. & Bennet, J.T. (1975). Cost-push versus demand-pull inflation: Some empirical evidence.
Journal of Money, Credit & Banking, Vol. 7, No. 3, pp. 391-397.
Coiran, Z. (2014). Monetary policy, inflation and the causal relation between the inflation rate and some
of the macroeconomic variables. Procedia Economics and Finance Vol. 16, No. 1, pp. 391-401.
Davis, S. (2017). Inflation targeting in South Africa. http://sharondavis.co.za/content/view/74 /32. Date
of Access: 3 June 2017.
de Jongh, J.J.; Meyer, N. & Meyer, D.F. (2016). Perceptions of local businesses on the employment tax
incentive act: The case of the Vaal Triangle Region. Journal of Contemporary Management, Vol. 13,
No. 1, pp. 409-432.
De Waal, A. & Van Eyden, R. (2014). Monetary policy and inflation in South Africa: a VECM
augmented with foreign variables. South African Journal of Economics, Vol. 82, No. 1, pp. 117-140.
Du Plessis, S. & Rietveld, M. (2013). Should inflation targeting be abandoned in favour of nominal
income targeting? Stellenbosch Economic Working Papers No. 12/13. Cape Town: Stellenbosch
University Press.
Du Plessis, S. (2015). Targeting core inflation in emerging-market economies. Economic Modelling,
Vol. 45, No. 1, pp. 53-68.
Fand, D. (1969). Keynesian monetary theories, stabilization policy, and the recent inflation. Journal of
Money, Credit & Banking, Vol. 1, No. 3, pp. 556-587.
Fedderke, J.W. & Schaling, E. (2005). Modelling inflation in South Africa: A multivariate cointegration
analysis. South African Journal of Economics, Vol. 73, No. 1, pp. 79-92.
Gali, J. (2015). Monetary policy, inflation, and the business cycle: An introduction to the New
Keynesian Framework and its Applications. New Jersey: Princeton University Press.
Gujarati, D.N. & Porter, D.C. 2008. Basic econometrics. 5th Ed. Boston: McGraw-Hill Irwin.
Guru, S. (2016). The structural theory of inflation – explained. Retrieved from http://www.your
articlelibrary.com/macro-economics/inflation-macro-economics/the-structural-theory-of-inflation
explained/37980, date: 08.10.2017.
Kabundi, A.; Schaling, E. & Some, M. (2015). Monetary policy and heterogeneous inflation
expectations in South Africa. Economic Modelling, Vol. 45, No. 1, pp. 109-117. Matemilola, B.T.;
Bany-Ariffin, A.N. & Muhtar, F.E. (2015). The impact of monetary policy on bank lending rate in
South Africa. Borsa Istanbul Review, Vol. 15, No. 1, pp. 53-59.
Mehrara, M.; Behzadi, M.S. & Razaei, S. (2016). The impact of government spending on inflation
through the inflationary environment, STR approach. World Scientific News, Vol. 37, No. 1, pp. 153-
167.
Mellet, A. (2012). A critical analysis of South African economic policy. Thesis – PhD. Vanderbijlpark:
NWU.
Mills, S. (2016). How to fix SA’s labour market. Retrieved from http://www.fin24.co.za/
how_to_fix_sa_ Labour_market/2016. date: 3.06.2017.
Mohr, P. & Fourie, L. (2011). Economics for South African students. Pretoria: Van Schaik Publishers.
Ntingi, A. (2015). Cut taxes to boost economy and reduce inflation. Retrieved from
https://www.iol.co.za/business-report/opinion/cut-taxes-to-boost-economy-and-reduce-inflation
2009843. date: 30.08.2017.
Pesaran, M.H. & Shin, Y. (1996). Cointegration and speed of convergence to equilibrium. Journal of
Econometrics, Vol. 71, No. 1, pp. 117-143.
Reichlin, L. & Baldwin, R. (2013). Is inflation targeting dead? London: Centre for Economic Policy
Research.
Riba, L. (2017). The relationship between tax and economic growth: A South African perspective.
Dissertation – M.Com. Cape Town: University of Cape Town.
SARB (South African Reserve Bank). (2017a). Monetary policy. Retrieved from
https://www.resbank.co.za /monetary policy/pages/monetarypolicy-home.aspx. date: 03.07. 2017.
SARB (South African Reserve Bank). (2017b). Current market rates. Retrieved from
https://www.resbank. co.za/fastsearch/pages/results.aspx?k=rates. date: 03.06 2017.
Sen, G.C. (2016). Structural inflation in the LDC’s. Retrieved from http://www.yourarticlelibrary.
com/macro-economics/inflation-macro-economics/structural-inflation-in-the-ldcs/40951 date: 08.10.
2017.
Stats SA (Statistics South Africa). (2017a). Interest rates: Historical data. Pretoria: Government
Printer.
Stats SA (Statistics South Africa). (2017b). Quarterly labour force survey: Quarter 4. Pretoria:
Government Printer.
Stats SA (Statistics South Africa). (2017c). Inflation rate: Historical data. Pretoria: Government
Printer.
Taylor, J.B. (2015). Inflation targeting in emerging markets: The global experience. Economic
Modelling, Vol. 45, No. 1, pp. 1-18.
Tinbergen, J. (1952). On the theory of economic policy. Amsterdam: Erasmus University Press.
Van Aardt, C. & Van Tonder, J. (2011). Optimal prime rate estimates using the Rudebusch method.
Pretoria: UNISA Press.
Van der Merwe, E.J. & Mollentze, S.L. (2010). Monetary economics in South Africa. 2nd Ed. Cape
Town: Oxford University Press.
Woodford, M. (2003). Interest and prices: Foundations of a theory of monetary policy. 2nd Ed. New
Jersey, NJ: Princeton University Press.
Published
2021-06-25
How to Cite
Collective Authors. (2021). Macroeconomics and Monetary Economics - 2: Array. Acta Universitatis Danubius. Œconomica, 14(6). Retrieved from https://dj.univ-danubius.ro/index.php/AUDOE/article/view/1186
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