Is there a nexus between inflation, exchange rate and unemployment in South Africa: an econometric analysis?

Abstract

The nexus between exchange rate, unemployment and inflation is one of the most hotly debated issues because disagreements persist between economists on the relationship between these variables. This is because of different perspectives from different schools of thoughts. The monetarists view inflation as a monetary phenomenon, while the conflict approach view inflation as a symptom of fundamental disharmony in a society. Nonetheless, South Africa is still an emerging economy that is developing and grasping with high level of joblessness and small size of gross domestic product (GDP). This article examines the association amongst exchange rate, unemployment and inflation in South Africa. Cointegration techniques were used capture the association amongst the variables. The Engle-Granger test (causality) in- addition to the response function (impulse) were used correspondingly to estimate the causality result as well as the reaction of exogenous shocks amongst the variables. The results indicate that unemployment is negatively related to inflation, while there is a affirmative association amongst exchange rate plus inflation. This infers that the country is grasping with the difficulties of the trade-off between inflation and unemployment, which is problematic to deal with concurrently. A need for a policy mix to even out the curves for a smooth economy has become imperative.