The structuralist theory of imported inflation: an application to South Africa

Abstract

This study emphasizes the importance of identifying the origin of inflation in the present context of inflation targeting by many emerging market and transition economies. The analysis shows, based on South African data, how structural (supply) and demand inflation can be distinguished. The results indicate that South Africa's inflation experience between 1973q1 and 1998q4 is characterized by two monetary regimes. During the first regime (1973q1–1984q4) the long-run cause of inflation is demand-pull. The second regime (1987q1–1998q4) represents major changes to structural (‘imported’) and cost-push inflation. The two-year period 1985–1986 signifies structural change from the first to the second regime. Moreover, the results in the second regime remain robust when the inflation model is subjected to ‘new’ out-of-sample data until 2001q2. Evidence of structural (‘imported’) inflation in the second regime suggests that inflation should not entirely be squeezed out of the system nor should it necessarily be kept at the lowest possible level, because some inflation may be regarded as the natural by-product of the growth and development process. South Africa's inflation experience points to several lessons for existing (and potential) emerging market and transition economies with some form of inflation targeting.

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