Money, inflation and growth in South Africa

The main objective of this thesis is to assess the effectiveness of monetary policy in SouthAfrica to promote high and sustainable real economic growth rates after the adoption of moremarket-oriented measures in 1980. The thesis consists of three interrelated issues which areexamined from the early 1960s until the late 1990s: the exogenous/endogenous nature of themoney supply, the underlying causes of inflation and the costs and benefits of inflation.The main findings that emerge from the thesis are as follows. From a long-run perspective,the results show that the money supply is endogenously determined and that the moneysupply has been passive in the inflationary process over the period 1966-1997. Theinflationary impact of excessive monetary expansion is only relevant over the period 1966-1979 when monetary policy was based on direct control measures. However, direct controlmeasures were largely ineffective in reducing and stabilising inflation because the moneysupply was also endogenously determined during the period 1966-1979. The endogenousnature of the money supply required a more extensive analysis of the underlying causes ofinflation which may not necessarily have been the outcome of excessive monetary expansionby the monetary authorities. After an extensive analysis of structural and/or cost-push forcesof inflation, the empirical results indicate that the causes of inflation have changed from ademand-pull inflation over the period 1973-1983, to a cost-push cause of inflation (importprices and wage rate changes) since 1987 when a market determined exchange rate finallystabilised.The study suggests that even though the cause of inflation was essentially cost-push since themid-1980s, restrictive demand management policies were effective in reversing theaccelerating inflationary trend experienced since the early 1970s. Moreover, the negativeimpact of double digit inflation on economic growth during the deflationary zone, supportsthe South African Reserve Bank's (SARB) primary objective of low and stable inflation rates.However, the growth benefits of mild inflation indicate that the SARB's unofficial inflationtarget of 1-5 percent is too conservative. Furthermore, restrictive monetary policy which isgeared towards unrealistically low or even zero inflation, imposes a permanent cost. Cost-push inflation resulting from exchange rate depreciations and wage rate changes will alwayscreate an environment which is biased towards inflation. To control cost-push inflationdemand management policies will have to be restrictive on a permanent basis, but at the costof permanent output and employment losses.