Inflation, output growth and their uncertainties in South Africa: Empirical evidence from an asymmetric multivariate GARCH-M model

The study examines the relationships between inflation uncertainty and output growth uncertainty, and analyzes their effects on the level of inflation and output growth in South Africa. An asymmetric multivariate GARCH-M model suggested by Grier et al. (2004) is applied. The findings suggest that while uncertainty about growth is detrimental to output growth, inflation uncertainty is not. The findings further reveal that Cukierman and Meltzer (1986) hypothesis of a positive impact of inflation uncertainty on the level of inflation is supported, and there exists a negative impact of output growth uncertainty on inflation. No association could be found between inflation uncertainty and output growth uncertainty. The findings imply that output growth and its uncertainty should not be treated separately as it is usually suggested by business cycle models. In addition, both output growth uncertainty and inflation uncertainty should be considered as part of the determinants of output growth in South Africa.