Abstract
We analyze the impact of inflation, growth and exchange rate on unemployment in South Africa using annual data spanning 1980- 2017. Using the ARDL methodology we find that there is a negative longrun relationship between inflation and unemployment in South Africa and inflation is significant in explaining unemployment. Other variables of interest, economic growth and exchange rate are also significant in explaining unemployment. We use the findings of our study to propose that the South African Reserve Bank(SARB) should consider revising its objectives so that they can consider getting involved in targeting unemployment so that they help nurse the economy from the wounds of high inequality and poverty.
Highlights
South Africa has been characterized by high levels of unemployment, poverty and inequality 23 years into its democracy
The study uses a Vector Autoregressive (VAR) model with monthly data spanning 1960 to 1996 and the findings suggest that a monetary policy that is contractionary in nature does negatively affect employment
We find that exchange rate and growth are significant variables in our model together with the dummy controlling variable for the structural break 1980 -1999 pre-inflation targeting period and 20002017 inflation targeting period
Summary
South Africa has been characterized by high levels of unemployment, poverty and inequality 23 years into its democracy. South Africa adopted a new monetary policy in 2000 which has only one objective, to target inflation so as to make sure that there is price stability in the country. This happens after the Reserve Bank of South Africa has been unofficially targeting inflation for 2 years before its official inception in 2000 (Mboweni, (2003); SARB, 2004). Still on the idea of inflation expectations, the monetary policy trusts that lower inflation boosts investment in the economy create jobs and average incomes of citizens (Kabundi and Schaling, 2013). Assumptions behind inflation targeting monetary policy are meant to create a financially stable, investor and business-friendly environment (SARB, 2004). The central bank in order to achieve its main objective of stabilizing prices in the country is basically controlled by one main instrument which is the interest rate (SARB, 2004)
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