Inflation, Output and Monetary Policy in South Africa
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Date
2020-09-12
Authors
Ngalawa, Harold
Komba, Coretha
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
South Africa adopted inflation targeting as its monetary policy framework in
February 2000. The country’s monetary authorities, however, have struggled to
keep inflation within the targeted 3%-6% band. A review of the literature reveals
that an understanding of the inflation-output trade-off is essential for the
achievement of price stability. The effects of policy may be different depending on
whether the inflation-output trade-off is symmetric or asymmetric; and when it is
asymmetric, the outcome may vary contingent on whether the asymmetry is
convex or concave. In South Africa, the nature of this relationship is not known.
Estimation of the inflation-expectations augmented Phillips curve using the
difference Generalized Method of Moments on quarterly time series data for the
period 2000:3 to 2015:1 reveals that South Africa’s Phillips curve is concave
asymmetric. These estimation results, however, may not be policy-invariant because
they are obtained from “highly” aggregated historical data and the model
parameters are not structural. Consistent with the Lucas Critique, we formulate a
New Keynesian dynamic stochastic general equilibrium model calibrated on South
African data. Simulation results of the model show that a negative demand shock
reduces inflation and output while a positive demand shock of the same
magnitude leads to a smaller increase in inflation and a larger increase in output,
confirming the concave asymmetric inflation-output relationship found earlier.
Concavity of the Phillip’s curve implies declining sensitivity of inflation to the
strength of the economy, suggesting that any given change in inflation requires an
increasingly larger adjustment in output.
Description
Monetary Economics
Keywords
Phillips curve , in lation-output trade-of