Inflation in South Africa: An Assessment of Alternative Inflation Models

Inflation in South Africa: An Assessment of Alternative Inflation Models

Author: 
Fedderke, Johannes
Publisher: 
John Wiley & Sons Publishing Company
Date published: 
2018
Record type: 
Responsibility: 
Liu, Yang, jt. author
Journal Title: 
South African Journal of Economics
Source: 
South African Journal of Economics, Vol. 86, No. 2, June 2018, pp. 197-230
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.

Language: 
Country focus: 
Date created: 
Wednesday, December 5, 2018