Inflation And Economic Growth: An Estimate Of An Optimal Level Of Inflation In Namibia

Abstract

This study empirically investigates the inflation-economic growth relationship to determine whether a threshold effect exists and if so to estimate the optimal inflation level which is conducive for economic growth in Namibia. With this view, various tables and charts, correlation matrices, pair-wise Granger Causality tests and a quadratic regression equation was estimated by OLS. Time series annual data covering a sample period from 1980 to 2012 were used in the estimation process. Stationarity tests on the variables revealed that all variables are stationary in levels. While the Granger Causality test revealed that there is a two-way causality between economic growth and inflation. A quadratic equation by OLS estimated generated a threshold level of inflation to be at 12.0 per cent, which is conducive for economic growth in Namibia. The implication is that any inflation above this optimal level seems to affect economic growth negatively. South African Reserve Bank (SARB) pursues an inflation targeting framework and the target range for CPI, excluding interest on mortgage bonds (CPI-X) is defined as 3 per cent to 6 per cent, hence the upper band of 6 per cent seems to be rather low for the case of Namibia since the optimal level of inflation conducive for economic growth is 12.0 per cent. This is bearing in mind that the Bank of Namibia do not conduct independent monetary policy implying that the monetary policy is closely linked to the South African monetary policy. The result of the study might be useful for policymakers in providing some clue in setting an optimal inflation target.