Abstract
On the notion that inflation and economic growth are nonlinearly related at some level of inflation, this study investigates the effect of inflation on growth in South Africa and empirically estimates the optimal threshold at which inflation begins to impede economic growth. To this end, a Threshold Autoregressive (TAR) model is applied to analyse data for the period 1977 to 2022. We divide the full sample by monetary policy regime: the pre-inflation targeting regime (1977-1999) and the inflation targeting regime (2000-2022). This approach allows us to understand how policy changes affect the nature of the inflation-growth relationship and helps ascertain whether South Africa’s 3%-6% inflation target is well-placed. Our findings confirm a nonlinear relationship between inflation and economic growth. When we consider the full sample and the pre-inflation targeting period, inflation is shown to exert a negative effect on economic growth above inflation thresholds of 5.0% and 13.1% respectively. For the inflation targeting period, inflation is found to be positively related to economic growth above a 4.5% inflation threshold. The variations in sub-sample results underscore the role of monetary policy conduct in shaping inflation-growth dynamics. Collectively, the findings reinforce the concept of nonlinearity, showing that while moderate inflation can foster economic growth, excessive inflation becomes detrimental to growth. The study recommends a downward revision of the upper limit of the 3%-6% inflation target set by the South African Reserve Bank, to a target range between 3%-4.5%.