Los primeros años (1939-1949)

The overall empirical findings of the study revealed that domestic inflation is determined by both internal and external factors. The results from the study revealed that internal factors such as, inflation expectations, government consumption expenditure, GDP, unit labour cost and external factors such as import prices (foreign prices) and exchange rate were significant determinants of inflation in South Africa for the period from 1970Q1 to 2015Q4.

While cost-push factors were found to be dominant in determining domestic inflation in the model, demand-pull inflation factors were also found to be significant determinants of inflation in South Africa. The result of the study revealed that inflation expectations and government consumption expenditure have a positive and significant impact on domestic inflation. Although money supply was found to be insignificant in determining domestic inflation, the hypothesis that inflation in determined by demand-pull inflation factors in South Africa cannot be rejected.

Empirical results suggest that cost-push inflation factors have been significant determinants of inflation in South Africa. The results showed that import prices and unit labour cost were positively and significantly associated with inflation. On the other hand, exchange rate was also found to have a negative and significant influence on domestic inflation. The findings of this study lead to the conclusion that the hypothesis that inflation in determined by cost-push inflation factors in South Africa cannot be rejected. Thus, the general hypothesis that inflation is determined by both demand-pull inflation and cost-push factors in South Africa cannot be rejected. South Africa import most of its commodities, and its output growth is reliant on imported intermediate input and capital goods. This degree of reliance on imported inputs (i.e. oil, grain commodities, machinery, etc.) makes South African producers‟ more susceptible to exchange rate fluctuations. The significant effect of import prices further explains the degree of influence by external determinants on domestic inflation. While it was envisaged that the re-integration of South Africa into the global economy in the early 1990s would bring

116

about increased competition through importation of lower priced foreign goods, which in turn, would restrain the impact of rising cost of production while simultaneously hindering domestic producers of goods and services to pass on high cost pressures to consumers. However, the benefit emanating from such process has been partially offset by development in the global factors that have had severe negative impact on emerging market economies such as South Africa and its main trading partners, particularly as a result of the excessive currency depreciation since the 2008 global financial crisis.

Exchange rate has a negative and significant relationship with domestic inflation. The negative impact of exchange rate on inflation suggest that the South African is more susceptible to exchange rate fluctuations particularly given the degree of reliance on imported foreign goods and services. Given that exchange rate is negatively associated with inflation, the hypothesis that macroeconomic determinant of exchange rate is negatively associated with inflation in South Africa cannot be rejected.

Money supply was found to be statistically insignificant in terms of its influence on the rate of inflation in South Africa. However, the sign of the coefficient was positive. Based on this result, the hypothesis that a positive relationship exist between inflation and money supply in South Africa cannot be rejected. The result obtained in the study suggest that cost-push and demand pull as well as structural factors have much broader and unintended consequence on domestic inflation than traditional monetary variables. However, given the challenges often experienced in maintaining the rate of inflation within the 3% to 6% target range, monetary authorities should be cognisant of the effect of increase in monetary base particularly given its positive association with domestic inflation.

GDP was found to have a negative and significant influence on domestic inflation. This implies that an increase in the GDP result in a decline in the general price level. Stable and low inflation is amongst the main macro-economic policy objectives in South Africa, and whilst the formulation and pursuit of this policy objective is not an easy task,

117

sustainable economic growth remains crucial in determining the level of domestic inflation. In order to achieve the objective of stable and low inflation there is a need to explore other sustainable growth stimulation policies since the results of this study suggests that potential growth prospects have significant policy implication on domestic inflation.

The dummy variable included in the model captures the impact of regime change in monetary policy from the eclectic approach to the current inflation targeting framework. The coefficient for the introduction of inflation targeting framework is negatively related to the rate inflation in South Africa and it is statistically significant. This suggests that the introduction of the new monetary policy framework in 2000 was successful in reducing the rate of inflation between 2000 and 2015. This result also shows that although the current monetary policy framework has had mixed success since its implementation, where inflation has moved above the 3% to 6% target, monetary authority have been able to maintain the rate of inflation within the set target, however the current framework appears not to respond efficiently to external shocks. Thus, it is recommended that inflation targeting as a monetary policy framework in South Africa be maintained. Although empirical studies found that targeting inflation comes at a cost of slow growth and high rate of unemployment (see Pollin and Zhu, 2006), it is also important to note the overall positive contribution of inflation targeting framework in South Africa since its implementation.

The error correction term coefficient was found to be negative and statistically as expected. This implies that any deviations in inflation adjust by approximately 7% quarterly to re-establish its long-run equilibrium path. This result confirmed the presence of a long run equilibrium relationship between inflation and it‟s identified determinants.

Based on the results of the study and taking into account the lesser degree of control that monetary authorities have in influencing labour costs, which is also significant in influencing inflation in South Africa, it is recommended that more emphasis be placed

118

on anchoring inflation expectations. This recommendation emanates from the fact that inflation expectations play an important role in influencing labour costs and subsequently the rate of inflation under the current monetary policy framework (see SARB, 1994; Kaseeram et al., 2004). It is further recommended that a more comprehensive set of fiscal and industrial policy instruments (which include, among others, producer support through subsidisation and reduction of import tariffs on input material not available domestically) be considered. This consideration should be based on using non-monetary support mechanisms (such as increase in import duties to protect domestic industries) that do not result in an increase in government expenditure. Other cost-saving and industrial policy programmes (such as Special Economic Zones) that are designed to improve efficiencies and reduce the cost of production should also be prioritised.

This recommendation is based on the finding of the study that supply-side factors such as import prices, exchange rate and labour costs have been identified as significant determinants of inflation in South Africa. Given the current economic environment which appear to be significantly influenced by recent growing political instability, such policy intervention, would also assist in minimizing the impact of sources of instability emanating from external factors (i.e. external currency shocks, drought, higher foreign prices, etc.). These sources of instability affect an already limited ability of policy makers, particularly the monetary authority, in their effort to keep the rate of inflation within the desired target range of 3% to 6%.

Finally, it could be argued that the influence of external factors such as exchange rate and import prices which are significant within the model could perhaps be addressed by switching to an alternative monetary policy framework, such as exchange rate targeting. However, this alternative monetary policy would prove to be difficult to implement in an open economy such as South Africa, mainly due to its impact on capital inflow and outflow into the country (see Akinboade et al., 2004). Adopting this monetary policy framework could have unintended consequences in maintaining a stable exchange rate and could also threaten the SARB mandate of achieving and maintaining price stability in South Africa. Other possible alternative monetary policy frameworks which were

119

adopted in the past would not do much in reducing the rate of inflation particularly given the structural nature of inflation in South Africa, hence the study recommends that the current inflation targeting framework be maintained while simultaneously being supplemented by other non-monetary policy measures, in order to achieve the macroeconomic policy objective of stable and low inflation in South Africa.