Classical or Keynesian? Testing the Asymmetric Relationship between Inflation and Economic Growth in South Africa

Thomas Habanabakize, Zandri Dickason-Koekemoer

Abstract

The correlation and cointegration between economic growth and inflation is one of the most discussed topics within various economic schools. While classical economists acknowledge an inverse relationship between inflation and economic growth, Keynesian economists posit that a positive relationship exists between these two economic variables. To ascertain which economic theory prevails in the South African economy, the current study applies a Nonlinear Autoregressive Distributed Lag (NARDL) model on quarterly data sets between 2008 and 2022. The estimated results suggest the presence of a negative asymmetric long-run relationship between inflation and economic growth. Consequently, the empirical findings support the classical hypothesis dominance, suggesting a negative effect of inflation on economic growth. Based on these results, price stability should be considered a core requirement in ascertaining long-term economic growth in South Africa. Additionally, instead of enduring high-level inflation as hypothesized by Keynesian theory, the enhancement of long-run economic growth in South Africa necessitates anti-inflationary policies.

 

Keywords: economic growth, inflation, nonlinear autoregressive distributed lag, South Africa.

 

DOI: https://doi.org/10.55463/hkjss.issn.1021-3619.62.14


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