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A Sticky Information Phillips Curve for South Africa

  • Monique Reid and Gideon Du Rand

Mankiw and Reis (2002) propose the Sticky Information Phillips Curve as an alternative to the standard New Keynesian Phillips Curve, to address empirical shortcomings in the latter. In this paper, a Sticky Information Phillips curve for South Africa is estimated, which requires data on expectations of current period variables conditional on sequences of earlier period information sets. In the literature the choice of proxies for the inflation expectations and output gap measures are usually not well motivated. In this paper, we test the sensitivity of model fit and parameter estimates to a variety of proxies. We find that parameter estimates for output gap proxies based either on a simple Hodrik-Prescott filter application or on a Kalman filter estimation of an aggregate production function are significant and reasonable, whereas methods employing direct calculation of marginal costs do not yield acceptable results. Estimates of information updating probability range between 0.69 and 0.81. This is somewhat higher than suggested by alternative methods using micro-evidence (0.65 – 0.70 (Reid, 2012)). Lastly, we find that neither parameter estimates nor model diagnostics are sensitive to the choice of expectation proxy, whether it be constructed from surveyed expectations or the ad hoc VAR based forecasting methods.

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Paper provided by Economic Research Southern Africa in its series Working Papers with number 381.

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Length: 30 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:rza:wpaper:381
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  1. Olivier Coibion, 2010. "Testing the Sticky Information Phillips Curve," The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 87-101, February.
  2. Mankiw, N. Gregory & Reis, Ricardo, 2002. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Scholarly Articles 3415324, Harvard University Department of Economics.
  3. Laurence Ball, 1990. "Credible Disinflation with Staggered Price Setting," NBER Working Papers 3555, National Bureau of Economic Research, Inc.
  4. Jordi Galí & Mark Gertler & J. David López-Salido, 2000. "European Inflation Dynamics," Banco de Espa�a Working Papers 0020, Banco de Espa�a.
  5. Reid, Monique, 2015. "Inflation expectations of the inattentive general public," Economic Modelling, Elsevier, vol. 46(C), pages 157-166.
  6. Rodrigo Fuentes, Marco Morales, 2007. "Measuring TFP: A Latent Variable Approach," Working Papers Central Bank of Chile 419, Central Bank of Chile.
  7. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  8. Khan, Hashmat & Zhu, Zhenhua, 2006. "Estimates of the Sticky-Information Phillips Curve for the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 195-207, February.
  9. Christopher D Carroll, 2002. "Macroeconomic Expectations of Households and Professional Forecasters," Economics Working Paper Archive 477, The Johns Hopkins University,Department of Economics.
  10. D Hodge, 2002. "Inflation "Versus" Unemployment in South Africa: Is There a Trade-Off?," South African Journal of Economics, Economic Society of South Africa, vol. 70(3), pages 193-204, 03.
  11. Rosa, Carlo & Verga, Giovanni, 2007. "On the consistency and effectiveness of central bank communication: Evidence from the ECB," European Journal of Political Economy, Elsevier, vol. 23(1), pages 146-175, March.
  12. Jeffrey C. Fuhrer & George R. Moore, 1993. "Inflation persistence," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  13. Sbordone, A.M., 1998. "Prices and Unit Labor Costs: a New Test of Price Stickiness," Papers 653, Stockholm - International Economic Studies.
  14. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, June.
  15. J.W. Fedderke & E. Schaling, 2005. "Modelling Inflation In South Africa: A Multivariate Cointegration Analysis," South African Journal of Economics, Economic Society of South Africa, vol. 73(1), pages 79-92, 03.
  16. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
  17. David F. Hendry & Bent Nielsen, 2007. "Preface to Econometric Modeling: A Likelihood Approach
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    ," Introductory Chapters, Princeton University Press.
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