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Inflation, growth and employment in South Africa: Trends and trade-offs

It is often publicly contended that overly strict application of inflation targeting stifles employment growth in South Africa, with the Phillips curve often cited as seemingly authoritative reference. This paper revisits this debate and argues that the Phillips curve has often been misinterpreted and subsequently applied incorrectly. Furthermore, this paper investigates the effect of inflation on employment in South Africa via the effects of inflation on output. It aims to determine whether higher inflation could contribute to employment creation. Using the Engle-Granger Error-Correction approach, long run trends as well as short run dynamics of this relationship in the South African economy are explored. Evidence is found of a positive cointegrating long run relationship between employment and output, leading to the assertion that anything that negatively effects output (such as high inflation) will by extension harm employment creation. No significant relationship in the short run between the level of inflation or shocks to inflation and employment creation could be found. The conclusion is that the current relatively low and constant inflationary environment, attributed to the inflation targeting regime, is actually conducive to employment creation in South Africa.

Working paper 547
1 September 2015
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in Southern African Business Review
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