Threshold effects and inflation persistence in South Africa

Abstract

PurposeThe purpose of this paper is to evaluate threshold effects in the persistence of South African aggregate inflation data.Design/methodology/approachThe conventional approach for assessing the degree of persistence within an inflation process is via its integration properties. This study makes use of univariate threshold autoregressive (TAR) models and associated unit root testing procedures to investigate the integration properties of the inflation data. Out‐of‐sample forecasts are further performed for the TAR models and their linear counterparts.FindingsThe empirical results confirm threshold effects in the persistence of all employed aggregated measures of inflation, whereas such asymmetric effects are ambiguous for disaggregated inflation measures. None of the observed series is found to be stationary in their levels. The out‐of‐sample forecasts for all TAR models outperform their linear counterparts.Practical implicationsGiven the scope of the study, the empirical analysis provides insight with concern to the performance of inflation subsequent to the adoption of the inflation target regime in South Africa. Of particular interest are the low persistence levels observed at inflation rates of below 4.7 and 4.4 percent for core and CPI inflation, respectively, as both these aggregated measures of inflation play an essential role in guiding monetary policy conduct within the economy. The overall findings imply that on an aggregate level, the South African Reserve Bank's (SARB's) current inflation target of 3‐6 percent encompasses a non‐stationary inflation range and thus proves to be restrictive on monetary policy conduct.Originality/valueThe paper fills in an important gap in the academic literature by evaluating asymmetric effects in the integration properties of inflation, at both aggregated and disaggregated levels, for the exclusive case of South Africa.