The effects of macroeconomic instability and inflation on sustainable real growth in South African firms

Abstract

This empirical study is an investigation of the impact that inflation and other factors have had on the growth of business firms in South Africa. Using the model of sustainable growth, an empirical multivariate model is developed to test a variety of assumed relationships and to isolate the impact of inflation. A data set of South African firms’ financial statements during the period 1983- 1996 was assembled to permit a detailed examination of these firms’ financial performance during South Africa’s period of isolation. Utilising both direct and indirect measures of inflation, we determine that inflation affects growth in a negative manner. By combing firm-level and macro data issues relating to the endogeneity of inflation, we argue that macroeconomic instability is the true factor adversely affecting firm growth during this period of time.