Inflation Spill-overs from BRIC to SADC Economies: The Impossible Trinity Theory Analysis

Abstract

This paper examined the potential inflation spill-over effects from BRIC to five SADC countries (Angola, Botswana, South Africa, Tanzania and Zambia) by using data collected for the period 1985-2020. Thirty-six (36) observations were used to obtain more reliable results with greater precision. Studies conducted on the impossible trinity argue that, in the case of highly financially integrated economies, domestic interest rates are tightly linked to the international interest rates if it is impossible to manipulate domestic interest rates. Specifically, interest rates for open economies tend to be influenced by international interest rates if these economies opt for free capital flows with a fixed exchange rate regime. Fisher's effect theory asserts that domestic interest rates trend positively with inflation rates. The principal method of research used is that of quantitative analysis. Given the empirical nature of the research, the paradigm employed is positivist. This paper employed the generalised method of moments (GMM) model, the Johansen cointegration procedure, and the Granger causality test in a vector error correction (VEC) model. The findings indicated that the fixed-exchange-rate regimes (soft pegs and hard pegs) are associated with high responsiveness of the domestic inflation rate to the foreign countries’ inflation rates, rather than to floating exchange-rate regimes (free-floating and managed floats). The policy implications for control of inflation in SADC economies are that, because of the financial market integration increase between SADC and BRIC economies, monetary authorities in SADC countries should consider floating exchange rate regimes (managed-floats or free-floating).