Inflation, Output and Monetary Policy in South Africa

dc.contributor.authorNgalawa, Harold
dc.contributor.authorKomba, Coretha
dc.date.accessioned2020-09-12T15:38:01Z
dc.date.available2020-09-12T15:38:01Z
dc.date.issued2020-09-12
dc.descriptionMonetary Economicsen_US
dc.description.abstractSouth 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.en_US
dc.description.sponsorshipAfrican Economic Research Consortiumen_US
dc.identifier.isbn978-9966-092-8
dc.identifier.urihttps://publication.aercafricalibrary.org/handle/123456789/730
dc.publisherAERCen_US
dc.relation.ispartofseriesResearch Paper 398;RP 398
dc.subjectPhillips curveen_US
dc.subjectin lation-output trade-ofen_US
dc.titleInflation, Output and Monetary Policy in South Africaen_US
dc.typeWorking Paperen_US
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