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Is the Phillips curve framework still useful for understanding inflation dynamics in South Africa

Author

Listed:
  • Byron Botha
  • Lauren Kuhn
  • Daan Steenkamp

Abstract

The Phillips curve is a commonly used benchmark for modelling inflation, based on the intuition that greater economic slack (i.e. a larger output gap) should be associated with decelerating inflation. But there is an ongoing debate about the usefulness of the Phillips curve to explain inflation. Explanations for an observed weakening between measures of slack and inflation have included: mismeasurement of economic slack, the influence of other factors (such as the exchange rate, foreign inflation or wages) or whether some components of the inflation basket are more sensitive to the business cycle than other. To advance this discussion, we consider an augmented Phillips curve specification that accounts for various drivers of inflation and test different measures of economic slack in forecasting inflation and GDP outcomes. We show that a Phillips curve relationship continues to exist in South Africa. We find the slack measure that performs best is one that includes labour market indicators and indicated in 2019Q3 that capacity pressure was low. While the output gap-inflation channel continues to operate, the contributions to inflationary pressures of factors such as past inflation and inflation expectations have been much more important over recent years.

Suggested Citation

  • Byron Botha & Lauren Kuhn & Daan Steenkamp, 2020. "Is the Phillips curve framework still useful for understanding inflation dynamics in South Africa," Working Papers 10211, South African Reserve Bank.
    • Handle: RePEc:rbz:wpaper:10211
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    References listed on IDEAS

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    Cited by:

    1. Andrew Phiri, 2022. "Pursuing the Phillips Curve in an African Monarchy: A Swazi Case Study," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 16(4), December.
    2. Dladla, Pholile & Malikane, Christopher, 2022. "Inflation dynamics in an emerging market: The case of South Africa," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 262-271.
    3. Monique B. Reid & Pierre L. Siklos, 2022. "How Firms and Experts View The Phillips Curve: Evidence from Individual and Aggregate Data from South Africa," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(12), pages 3355-3376, September.
    4. Christopher Loewald & David Faulkner & Konstantin Makrelov, 2020. "Time consistency and economic growth a case study of south african macroeconomic policy," Working Papers 10421, South African Reserve Bank.
    5. Chris Loewald & Konstantin Makrelov & Ekaterina Pirozhkova, 2022. "TheshorttermcostsofreducingtrendinflationinSouthAfrica," Working Papers 11029, South African Reserve Bank.

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