An econometric evidence of the interactions between inflation and economic growth in South Africa

Abstract

Little has been done on the relationship between inflation and economic growth, on contrary much empirical evidence commonly show failure to control the growth in real inputs. This paper used annual secondary data to examine the interactions between inflation and economic growth in South Africa during the period of 1980-2010. The Augmented Dickey-Fuller technique in testing the unit root property of the series is used while the hypothesis on the existence of a cointegrated relationship between inflation and economic growth is also tested using Johansen-Juselius co-integration technique. After confirming that a long run relationship between these two variables does exist, an extra effort was made to investigate the causality relationship by employing the Granger causality at two and four lag periods. The findings showed that uni-directional Causality is seen running from inflation to economic growth at both lag 2 and 4. Economic policy implications of findings are discussed and suggestions for future research direction are indicated in the paper.