Estimating a Phillips Curve for South Africa: A Bounded Random Walk Approach

Working paper 568
Author(s): 
Alain Kabundi, Eric Schaling and Modeste Some
Publication date: 
December, 2015
Classification-JEL: 
In this paper we estimate a Phillips curve for South Africa using a bounded random walk model. Central bank credibility, the slope of the Phillips curve, the natural rate of unemployment and the central bank’s in‡ation target band are time-varying. We …find that the slope of the Phillips curve has ‡attened since the mid 2000s - particularly after the Great Recession - which is in line with the …findings in most advanced countries. Our results do not lend support to the hypothesis that the ability of the SARB to hit its in‡flation target has decreased. With respect to the faith in the IT regime as measured by the degree to the extent of which in‡flation expectations are anchored to the target our results indicate that the SARB’s credibility has decreased from 1994 to 2001, remained constant from 2001 to 2008, and eventually increased around 2008. This pattern is different from that of advanced countries where expectations have become better anchored relatively early in the IT regime. Moreover, we …find that the increased stability of infl‡ation expectations after 2008 –which coincides with the Great Financial crisis - is not only a result of good policy but also of “good luck”.
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