Inflation and output growth dynamics in South Africa: Evidence from the Markov switching vector auto-regression model

This paper introduces the possibility of asymmetry in the relationship between output growth and inflation in South Africa based on signal extraction model. The Markov-switching vector autoregression is used to this end. The results of the empirical analysis show that, consistent with the attenuation principle, the response of output growth to inflation shocks is asymmetric and depends on inflation volatility regimes and the magnitude of the monetary policy reaction to inflation shocks.