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2019 | OriginalPaper | Chapter

19. Is There Evidence of the Trade-Off in Output and Inflation Volatilities in South Africa?

Authors : Eliphas Ndou, Thabo Mokoena

Published in: Inequality, Output-Inflation Trade-Off and Economic Policy Uncertainty

Publisher: Springer International Publishing

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Abstract

Evidence shows there is trade-off between output and inflation volatilities. The volatilities of inflation and the output were minimised in the inflation-targeting period. Evidence reveals that periods when the macroeconomic performance was superior coincided with the periods of minimal volatilities in both the inflation rates and the output gap.

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previous chapter Do Positive Bank Concentration Shocks Impact Employment in South Africa?

next chapter To What Extent Does the Output-Inflation Trade-Off Exist in South Africa and Is It Impacted by the Six Per Cent Inflation Threshold?

Taylor (1979), Chatterjee (2002), Olson et al. (2012), Ndou et al. (2013), and Ndou and Gumata (2017).

Moreover, theoretically the optimal point on the output-inflation efficiency frontier can only be achieved when a central banker has the independence to set policy without political backlash. Hence, discretionary policymaking translates to the central banker being able to choose the appropriate inflation variability aversion parameter to solve the minimisation problem and make independent policy decisions with a positive influence on a country’s stability and growth.

The two-year correlations approach is consistent with monetary policy being implemented in a forward looking way, such that the interest rates affect the economy in 18–24 months.

Chatterjee, S. (2002). The Taylor curve and the unemployment-inflation trade off. Business Review. Federal Reserve Bank of Philadelphia. www.phil.frb.org/researchreview/2002/q3/brq302sc.pdf.

Friedman, M. (2006). Tradeoffs in monetary policy. Paper presented as Unpublished Manuscript. Stanford University. www.nber.org/chapters/c0074.pdf.

King, M. (2013). Monetary policy: Many targets, many instruments. Where do we stand? Remarks at the IMF Conference on ‘Rethinking Macro Policy II: First Steps and Early Lessons’, Washington, DC.

Ndou, E., & Gumata, N. (2017). Inflation dynamics in South Africa: The role of thresholds exchange rate pass-through and inflation expectations on policy trade-offs. Cham: Palgrave Macmillan.CrossRef

Ndou, E., Gumata, N., Ncube, M., & Olson, E. (2013). An empirical estimation of the Taylor curve in South Africa (African Development Bank Working Paper No. 183). https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Working_Paper_189_An_Empirical_Investigation_of_the_Taylor_Curve_in_South_Africa.pdf.

Taylor, J. B. (1979). Estimation and control of a macroeconomic model with rational expectations. Econometrica, 47(5), 1267–1286.CrossRef

Title: Is There Evidence of the Trade-Off in Output and Inflation Volatilities in South Africa?
Authors: Eliphas Ndou
Thabo Mokoena
Publisher: Springer International Publishing
Book: Inequality, Output-Inflation Trade-Off and Economic Policy Uncertainty
Print ISBN: 978-3-030-19802-2

Electronic ISBN: 978-3-030-19803-9

Copyright Year: 2019
DOI: https://doi.org/10.1007/978-3-030-19803-9_19