Granger Causal Linkages Between Economic Growth and Fixed Capital Formation in South Africa: A Frequency Domain Analysis

Abstract

The purpose of this study is to examine the Granger causal linkages between gross fixed capital formation (GFCF) growth and economic growth in South Africa. To provide a more comprehensive analysis of the Granger causality (GC) relationships between these macroeconomic indicators, this study investigates these causalities in the frequency domain. The methodology is based on decomposing time series into weighted sinusoidal components and performing separate GC tests for each component. Test results reveal that there is feedback between capital formation and economic growth in South Africa in the frequency domain, even at the 1% significance level. Furthermore, the test results indicate that the GC from fixed capital formation to economic growth is detected in lower frequencies compared to the GC from economic growth to capital formation. This means that the severity of the GC from economic growth to capital formation is stronger than the reverse direction GC in South Africa.