Is there any causality between inflation and FDI in an ‘inflation targeting’ regime? Evidence from South Africa

This paper attempts to examine whether a long-run theoretical relationship does indeed exist between the level of inflation in South Africa and the amount of FDI eventually received by the country. It also attempts to provide insight into the purported macroeconomic benefits of the policy of ‘inflation targeting’, by ascertaining whether any causality exists between stable inflation levels and improved FDI inflows from a South African perspective. Utilising annual data ranging from 1970 to 2012, we employ time series techniques to answer our research objectives. Our results indicate that there is a long-run inverse relationship between the level of inflation and FDI inflow in South Africa, implying that a rise in the level of inflation would have a negative impact on the amount of FDI received by South Africa. Furthermore, the paper successfully demonstrates that a degree of causality does exist between stable inflation levels and improved FDI inflows from a South African perspective, suggesting that the policy change that occurred with the adoption of ‘inflation targeting’ by the South African authorities did have a significant impact on the average level of FDI inflow to the country. Consequently, one of the implications of our findings is that the policy of ‘inflation targeting’, if well-implemented, actively managed and consistently applied, could represent a vital organ of the policy toolkit available to governmental authorities and policymakers in South Africa and indeed all developing countries, in their bid to enhance the inflow of FDI to their respective countries.