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Cambridge Journal of Economics Advance Access originally published online on June 6, 2005
Cambridge Journal of Economics 2006 30(2):163-180; doi:10.1093/cje/bei051
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Right arrow E31 - Price Level; Inflation; Deflation
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© The Author 2005. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

Article

Inflation and growth in South Africa

D. Hodge*

* University of South Africa

Address for correspondence: email hodged{at}unisa.ac.za

Abstract

This paper studies the relationship between inflation and growth in South Africa. Two main issues are addressed: do tests of the South African data support the findings of cross-section studies that inflation has a negative effect on growth over the longer term? and, can higher growth be gained at the cost of higher inflation in the short run? The findings are that inflation drags down growth in South Africa over the longer term, and that, in the short run, growth above its trend requires accelerating inflation. Thus, for growth to be pulled substantially above its present low trend, inflation targeting in South Africa would have to be abandoned. However, this would be counterproductive over the longer term, once the negative relationship between inflation and growth manifests itself.

Key Words: Inflation • Growth • South Africa • Long run versus short run • Trade-off

JEL classifications: E31, E32, E61, O40, O55

Manuscript received March 1, 2004; final version received August 23, 2004.


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