Causality Effects among Gross Capital Formation, Unemployment and Economic Growth in South Africa

Abstract

Stagnant economic growth, decreasing investment and high unemployment remain consistent macroeconomic challenges for South Africa. Gross Capital formation (GCF) is designed to improve employment and economic growth (GDP). This study investigates the causality effects of the three variables using time series data from 1980 to 2018 in a Vector Autoregressive (VAR) framework. Results of the first model reveal a positive long-term relationship between gross capital formation GCF and economic growth GDP. Contrariwise, the first model indicates that unemployment (UNEMP) does not influence economic growth (GDP) in the short run. The second model results reveal a significant and positive relationship between UNEMP and GCF, while the third model shows an inverse relationship between GDP and UNEMP. Based on these findings, the study therefore recommends that fiscal authorities introduce expansionary fiscal policy that stimulates economic growth, investment and employment.