Business Confidence and Inflation in RSA: Variance Decomposition and General Impulse Response Functions Analysis

Abstract

The study empirically investigates how business confidence responds to inflation shocks in South Africa using the quarterly time series data spanning the period 1993Q1 – 2013Q1. The study applied the variance decomposition and the Generalized Impulse Response Functions (GIRF) analysis. The variance decomposition revealed that although inflation accounted for about 2 percent in the initial stages, it did account for about 27 percent to shocks in business confidence at later stages. The Generalized Impulse Response Functions (GIRF) also confirmed that inflation uncertainty does cause some negative shocks on how business managers/owners perceive the future of their business prospects. These results show that there is a negative relationship between business confidence and inflation in South Africa. DOI: 10.5901/mjss.2014.v5n16p128