NET LENDING SHOCKS AND INFLATION INSOUTH AFRICA: A SECTORAL ANALYSIS

Abstract

This study addresses the critical issue of identifying sectoral drivers of inflation in the South African economy, an area with limited empirical research. By examining net lending shocks from the financial, household, and government sectors over an extensive period from Q1 1960 to Q3 2022, the research aims to clarify the mechanisms underlying inflationary dynamics. Utilizing a Vector Error Correction (VEC) model, the findings indicate that net lending shocks from financial corporations have a mitigating effect on inflation, suggesting that increased lending in this sector can support price stability. In contrast, shocks from household and government sectors significantly contribute to inflationary pressures. This disparity highlights the complex interactions between different economic sectors and their distinct impacts on inflation. The results emphasize the need for a coordinated strategy that integrates both fiscal and monetary policies to effectively manage inflation in South Africa. By providing critical insights into how various sectors influence inflation, this study offers valuable insight for policymakers in designing targeted interventions. Overall, this research significantly enhances the understanding of sector-specific influences on inflation, contributing to more effective economic policy formulation in the context of South Africa’s dynamic economic environment.