Endogenous monetary approach to optimal inflation–growth nexus in Swaziland

Abstract

With the inflation-growth nexus being a hotly debated issue within the academic paradigm, the purpose of our study is to examine the relationship for Swaziland between 1975 and 2016 of which there currently exists very limited country-specific evidence. In the design of our study we theoretically depend on an endogenous monetary model of economic growth augmented with a credit technology which causes a nonlinear relationship between inflation and growth. Econometrically, we rely on the smooth transition regression (STR) which allows us to estimate an optimal inflation rate characterized by smooth transition between different inflation regimes. Our empirical results point to an inflation threshold estimate of 7.64% at which economic growth gains are maximized or similarly growth losses are minimized. In particular, we find that above the inflation threshold economic agents may be able to protect themselves from inflation through credit technology and a more urbanized population yet such high inflation adversely affects the influence of exports on economic growth. This noteworthy since a majority of government revenues is from trade activity via the country's affiliation with the Southern African Customs Union (SACU). Nevertheless, the major contribution of this paper is that it becomes the first to use endogenous growth theory to estimate the inflation threshold for any African country which will hopefully pave a way for similar studies on other African countries.

Inflation Threshold in the Context of Structural Breaks: Evidence from Egypt Using the Logistic Smooth Transition Regression Approach

“…The STR model is a more realistic approach, enabling us to endogenously estimate an optimal inflation rate specified by a smooth transition between different inflation regimes (Phiri, 2020;Zhang, 2017). Lundbergh et al (2003), Fok et al (2005), Gonzalez et al (2005), Teräsvirta 9) For further information on parameter instability in econometrics, see (Andrews 1993;Bai and Perron 1998;Brown, Durbin, and Evans 1975;Phillips and Hansen 1990;Zivot and Andrews 1992).…”

Pursuing the Phillips Curve in an African Monarchy: A Swazi Case Study

“…In this current research, we contribute to the literature by examining the usefulness of the Phillips curve in modelling inflationary behaviour in the Kingdom of Eswatini, as a low middle income Sub-Saharan Africa monarchy, whose monetary policy conduct is closely linked to that of South Africa via her affiliation to a common monetary area (CMA) agreement (Phiri, 2020). Whilst this arrangement helps the country manage inflation, it reduces the room for policymakers to respond to shocks using its main policy tool, the discount rate, and this makes fiscal-policy the primary counter-cyclical tool which has also been restricted due to low budgetary space, particularly in the post-2010 period (Brixiova-Schwidrowski et al, 2021).…”