Threshold Cointegration and Nonlinear Causality test between Inflation Rate and Repo Rate
Abstract
The current study investigated a cointegration and nonlinear causality relationships between inflation and repo rates of South Africa using the data spanning the period of January 2002 to March 2016. We used a threshold vector error correction model (TVECM) and nonlinear Granger frameworks causality to carry out the analysis. Preliminary analysis of data revealed the expected properties of the data such as nonlinearity, non-stationarity and co-movement of the variables. The two variables confirmed to be moving together in the long-run according to the observed supWald test statistic. Finally, the Diks-Panchenko nonlinear Causality test revealed a strong bidirectional nonlinear causal relationship between repo rate and inflation rate. The results imply that the use of repo rate to target the inflation rate during the target period did not address the financial problem in South Africa. Consequently, the study concluded that repo rate may not be a good measure to use for controlling inflation rates of South Africa.
Downloads
References
Ajmi, A. N., Aye, G. C., Balcilar, M. & Gupta, R. (2015). Causality between exports and economic growth in South Africa: Evidence from linear and nonlinear tests. The Journal of Developing Areas, 49(2), 163-181.
Bal, D. P. & Rath, B. N. (2015). Nonlinear causality between crude oil price and exchange rate: A comparative study of China and India. Energy Economics, 51, 149-156.
Balke, N. S. & Fomby, T. B. (1997). Threshold cointegration. International economic review, 2, 627-645.
Baum, C. F., Barkoulas, J. T. & Caglayan, M. (2001). Nonlinear adjustment to purchasing power parity in the post-Bretton Woods era. Journal of International Money and Finance, 20(3), 379-399.
Bonga-Bonga, L. & Kabundi, A. (2015). Monetary policy instrument and inflation in South Africa: Structural vector error correction model approach.
Chan, N. H. & Kutoyants, Y. A. (2012). On parameter estimation of threshold autoregressive models. Statistical inference for stochastic processes, 15(1), 81-104.
Chiou-Wei, S. Z., Chen, C. F. & Zhu, Z. (2008). Economic growth and energy consumption revisited—evidence from linear and nonlinear Granger causality. Energy Economics, 30(6), 3063-3076.
Diks, C. & Panchenko, V. (2006). A new statistic and practical guidelines for nonparametric Granger causality testing. Journal of Economic Dynamics and Control, 30(9), 1647-1669.
Diks, C. & Wolski, M. (2015). Nonlinear granger causality: Guidelines for multivariate analysis. Journal of Applied Econometrics, 4(1).
Enders, W. & Siklos, P. L. (2001). Cointegration and threshold adjustment. Journal of Business & Economic Statistics, 19(2), 166-176.
Esso, L. J. (2010). Threshold cointegration and causality relationship between energy use and growth in seven African countries. Energy Economics, 32(6), 1383-1391, 11//.
Franses, P. H. & Van Dijk, D. (2000). Non-linear time series models in empirical finance. Cambridge University Press.
Ghassan, H. B. & Banerjee, P. K. (2015). A threshold cointegration analysis of asymmetric adjustment of OPEC and non-OPEC monthly crude oil prices. Empirical Economics, 49(1), 305-323.
Ghosh, S. & Kanjilal, K. (2016). Co-movement of international crude oil price and Indian stock market: Evidences from nonlinear cointegration tests. Energy Economics, 53, 111-117.
Granger, C. W. J. & Lee, T. H. (1989). Investigation of production, sales and inventory relationships using multicointegration and nonâ€symmetric error correction models. Journal of applied econometrics, 4 (S1), S145-S159.
Gupta, R. & Komen, K. (2009). Time aggregation and the contradictions with causal relationships: can economic theory come to the rescue? University of Pretoria, Pretoria, 0002.
Hansen, B. E. & Seo, B. (2002). Testing for two-regime threshold cointegration in vector error-correction models. Journal of Econometrics, 110(2), 293-318.
Hiemstra, C. & Jones, J. D. (1994). Testing for linear and nonlinear Granger causality in the stock priceâ€volume relation. The Journal of Finance, 49(5), 1639-1664.
Iyke, B. N. (2015). On the term structure of South African interest rates: Cointegration and threshold adjustment.
Jonathan, D. & Kung-Sik, C. (2008). Time Series Analysis With Applications in R. New York: Springer Science and Business Media , LLC.
Karagianni, S., Pempetzoglou, M. & Saraidaris, A. P. (2013). Average tax rates and economic growth: A nonlinear causality investigation for the USA. Frontiers in Finance and Economics, 12(1), 51-59.
Leshoro, T. L. (2012). Estimating the inflation threshold for South Africa. Studies in Economics and Econometrics, 36(2), 53-65.
Lo, M. C. & Zivot, E. (2001). Threshold cointegration and nonlinear adjustment to the law of one price. Macroeconomic Dynamics, 5(04), 533-576.
Makatjane, K. D. & Moroke, N. D. (2016). Comparative Study of Holt-Winters Triple Exponential Smoothing and Seasonal Arima: Forecasting Short Term Seasonal Car Sales in South Africa. Risk governance & control: financial markets & institutions, 6(1).
Mboweni, T., Cross, M. J., Thahane, M. T., Marcus, M. G., van der Merwe, E., & Wiese, M. C. (2008). Statement of the Monetary Policy Committee. South African Reserve Bank, December, 6.
Nazlioglu, S., Kayhan, S. & Adiguzel, U. (2014). Electricity consumption and economic growth in Turkey: cointegration, linear and nonlinear granger causality. Energy Sources, Part B: Economics, Planning, and Policy, 9(4), 315-324.
Phiri, A. (2016). Tourism and economic growth in South Africa: Evidence from linear and nonlinear cointegration frameworks. Managing Global Transitions, 14(1), 31.
Ramsey, J. B. (1969). Tests for specification errors in classical linear least-squares regression analysis. Journal of the Royal Statistical Society. Series B (Methodological), 350-371.
Rossouw, J., Vermeulen, J. & Leshoro, L. (2014). Monetary Economics in South Africa. OUP Catalogue.
Seo, M. (2006). Bootstrap testing for the null of no cointegration in a threshold vector error correction model. Journal of Econometrics, 134(1), 129-150.
Shumway, R. H. & Stoffer, D. S. (2010). Time series analysis and its applications: with R examples. Springer Science & Business Media.
Stigler, M. (2010). Threshold cointegration: overview and implementation in R: Working paper.
Taylor, A. M. (2001). Potential pitfalls for the purchasingâ€powerâ€parity puzzle? Sampling and specification biases in meanâ€reversion tests of the law of one price. Econometrica, 69(2), 473-498.
Yau, H. Y. & Nieh, C. C. (2009). Testing for cointegration with threshold effect between stock prices and exchange rates in Japan and Taiwan. Japan and the World Economy, 21(3), 292-300.
Copyright (c) 2017 Katleho Makatjane, Ntebogang Moroke, Diteboho Xaba
This work is licensed under a Creative Commons Attribution 4.0 International License.
Author (s) should affirm that the material has not been published previously. It has not been submitted and it is not under consideration by any other journal. At the same time author (s) need to execute a publication permission agreement to assume the responsibility of the submitted content and any omissions and errors therein. After submission of a revised paper in the light of suggestions of the reviewers, editorial team edits and formats manuscripts to bring uniformity and standardization in published material.
This work will be licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) and under condition of the license, users are free to read, copy, remix, transform, redistribute, download, print, search or link to the full texts of articles and even build upon their work as long as they credit the author for the original work. Moreover, as per journal policy author (s) hold and retain copyrights without any restrictions.