A New Keynesian Phillips Curve for South Africa

A New Keynesian Phillips Curve for South Africa

Rulof Burger (University of Stellenbosch, South Africa) and Stan du Plessis (University of Stellenbosch, South Africa)
Copyright: © 2014 |Pages: 19
DOI: 10.4018/978-1-4666-4329-1.ch003
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In South Africa, as elsewhere, economists have not reached an agreed upon model for the Phillips curve, despite its importance for understanding the process of inflation and its relevance for policy makers. It has been a particular challenge to identify the role of aggregate economic activity in the inflationary process in the South African literature, since the breakdown of a reasonably traditional Phillips curve, which had existed until the early seventies. A comparatively new model of the Phillips curve, often called the New Keynesian Phillips Curve (NKPC), has recently received considerable interest and support from monetary economists. The South African literature is exceptional in that these models have not yet been applied locally, despite their close association with forward looking and rules-based monetary policy regimes such as the inflation-targeting regime of the South African Reserve Bank. This chapter takes a first step towards introducing the NKPC in the South African debate, by estimating standard, hybrid, and open economy versions of the model and comparing the results with the international literature as well as South African precedents. The authors find encouraging, though tentative, evidence that research along these lines might help to identify the impact of aggregate economic activity in the domestic process of inflation.
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2. The New Keynesian Phillips Curve

In the New Keynesian tradition nominal rigidities (which yield a non-vertical short run aggregate supply curve and non-vertical short run Phillips curve) are built on rational decision theoretic foundations (Mankiw, 2001). The NKPC is a linear approximation to a dynamic stochastic general equilibrium with nominal rigidities and rational expectations (Walsh, 2003). These features, the forward-looking and rational expectations and the general equilibrium and decision theoretical foundations allows the NKPC a role in policy analysis which has been closed to more traditional specifications since Lucas’s telling critique of econometric policy evaluation (Lucas, 1976).

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