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A sticky information Phillips curve for South Africa

  • Monique Reid

    ()

    (Department of Economics, University of Stellenbosch)

  • Gideon du Rand

    ()

    (Department of Economics, University of Stellenbosch)

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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File URL: http://www.ekon.sun.ac.za/wpapers/2013/wp222013/wp-22-2013.pdf
File Function: First version, 2013
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Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 22/2013.

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Date of creation: 2013
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Handle: RePEc:sza:wpaper:wpapers198
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  1. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
  2. 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.
  3. Laurence Ball, 1990. "Credible Disinflation with Staggered Price Setting," NBER Working Papers 3555, National Bureau of Economic Research, Inc.
  4. Olivier Coibion, 2010. "Testing the Sticky Information Phillips Curve," The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 87-101, February.
  5. Jordi Gali & Mark Gertler & J. David Lopez-Salido, 2001. "European Inflation Dynamics," NBER Working Papers 8218, National Bureau of Economic Research, Inc.
  6. Monique Reid, 2012. "Inflation Expectations of the Inattentive General Public," Working Papers 278, Economic Research Southern Africa.
  7. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Finance and Economics Discussion Series 93-17, Board of Governors of the Federal Reserve System (U.S.).
  8. Argia M. Sbordone, 2001. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Departmental Working Papers 200112, Rutgers University, Department of Economics.
  9. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June.
  10. 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.
  11. Christopher D Carroll, 2002. "Macroeconomic Expectations of Households and Professional Forecasters," Economics Working Paper Archive 477, The Johns Hopkins University,Department of Economics.
  12. David F. Hendry & Bent Nielsen, 2007. "Preface to Econometric Modeling: A Likelihood Approach
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  13. Rodrigo Fuentes, Marco Morales, 2007. "Measuring TFP: A Latent Variable Approach," Working Papers Central Bank of Chile 419, Central Bank of Chile.
  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. 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.
  16. 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.
  17. 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.
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