THE EFFECT OF STABILIZATION POLICIES ON THE GENERAL PRICE LEVEL IN THE SOUTHERN AFRICAN COMMON MONETARY AREA

Abstract

Ensuring economic stability hinges on the stabilization of the price level, as unanticipated fluctuations in prices can disrupt economic activity, fostering uncertainty among businesses, consumers, and investors. This investigation delves into the impact of stabilization measures on the general price level within the Southern African Common Monetary Area (CMA), employing the Panel Autoregressive Distribution Lag (PARDL) methodology. The analysis encompasses data from CMA economies spanning 1990 to 2022. The findings reveal that government revenue, interest rates, and exchange rates exert a significantly positive influence on the general price level over the long term. Conversely, the fiscal deficit exhibits an insignificant effect on the general price level in the long run. Notably, money supply and government expenditure demonstrate a significantly negative association with the general price level over the long term, indicating that increases in these variables do not necessarily correspond with heightened price levels within the CMA economies over time. Moreover, elevations in the interest rate fail to achieve the desired outcome of reducing the general price level within the CMA over the long term. Consequently, relying solely on interest rate adjustments for price level stabilization proves ineffective, as factors beyond monetary flows contribute to price dynamics within the CMA. Monetary policy in isolation proves inadequate for detecting inflationary pressures, underscoring the Imperative for fiscal interventions to manage macroeconomic conditions effectively.  Therefore, this study advocates for enhanced coordination between fiscal and monetary policies, emphasizing the necessity for vigilant oversight and execution. Additionally, in devising strategies to stabilize price levels, policymakers should prioritize addressing supply-side and structural determinants alongside traditional monetary measures.