Inflation in South Africa: An Assessment of Alternative Inflation Models

Research output: Contribution to journalArticle

Abstract

We consider the relative empirical performance of a range of inflation models for South Africa. Model coverage is of Phillips curve, New Keynesian Phillips curve, monetarist and structural models of inflation. Our core findings are that the single most robust covariate of inflation is unit labour cost. We further decompose unit labour cost into changes in the nominal wage and real labour productivity. The principal association is a strong positive relationship between inflation and nominal wages, while improvements in real labour productivity report only a relatively weak negative association with inflation. Supply-side shocks also consistently report an association with inflation. As to demand-side shocks, the output gap does not return a robust statistical association with inflation. Instead, it is growth in the money supply and government expenditure which return robust and theoretically consistent associations with inflationary pressure.

Original languageEnglish (US)
Pages (from-to)197-230
Number of pages34
JournalSouth African Journal of Economics
Volume86
Issue number2
DOIs
StatePublished - Jun 2018

Fingerprint

South Africa
Inflation
Labour productivity
Wages
Unit labour costs
Money supply
Structural model
Government expenditure
Output gap
New Keynesian Phillips curve
Phillips curve
Covariates
Supply side

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Cite this

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abstract = "We consider the relative empirical performance of a range of inflation models for South Africa. Model coverage is of Phillips curve, New Keynesian Phillips curve, monetarist and structural models of inflation. Our core findings are that the single most robust covariate of inflation is unit labour cost. We further decompose unit labour cost into changes in the nominal wage and real labour productivity. The principal association is a strong positive relationship between inflation and nominal wages, while improvements in real labour productivity report only a relatively weak negative association with inflation. Supply-side shocks also consistently report an association with inflation. As to demand-side shocks, the output gap does not return a robust statistical association with inflation. Instead, it is growth in the money supply and government expenditure which return robust and theoretically consistent associations with inflationary pressure.",
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Inflation in South Africa : An Assessment of Alternative Inflation Models. / Fedderke, Johannes; Liu, Yang.

In: South African Journal of Economics, Vol. 86, No. 2, 06.2018, p. 197-230.

Research output: Contribution to journalArticle

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