Inflation dynamics in South Africa: The role of public debt (original) (raw)

Orientation: Inflation targeting requires prudent fiscal policy to achieve desired results.Motivation for the study: Since the 2007–2008 financial crisis, fiscal authorities in South Africa have implemented an aggressive fiscal stimulus that has resulted in an acceleration of public debt, accompanied by a sustained government deficit. At the same time, the economy has continued to struggle with achieving significant growth to assist the government with its ever-growing expenditure obligations.Research Purpose: This study set out to investigate the relationship between inflation dynamics and the stance of fiscal policy, with a focus on public debt, in South Africa.Method: This study employs a New Keynesian dynamic stochastic general equilibrium (NKDSGE) model with financial frictions calibrated on South African data.Main Findings: The results of this study showed that when fiscal authorities put a relatively small weight on the control of public debt, inflation significantly increase...