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Do Inflation Regimes Affect the Transmission of Positive Nominal Demand Shocks to the Consumer Price Level?

  • Eliphas Ndou
  • Thabo Mokoena
Chapter

Abstract

Evidence reveals that real output rises much higher in the low inflation regime than in the high inflation regime. Thus, a nominal demand policy shock affecting aggregate demand will have a bigger effect on real output in the low inflation regime than in the high inflation regime. We find that inflation rises and fluctuates much higher in the high inflation regime than in the low inflation regime, following a nominal demand shock. Evidence confirms the new Keynesian hypothesis, which implies that a demand policy is less effective in countries with high trend inflation and where prices are less rigid.

References

  1. Ball, L., Mankiw, N. G., & Romer, D. (1988). The new Keynesian economics and the output-inflation tradeoff. Brooking chapters on Economic Activity, 1, 1–65.Google Scholar
  2. 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. Palgrave Macmillan.Google Scholar
  3. Sun. (2012). Nominal rigidity and some new Keynesian evidence on the new Keynesian theory of the output-inflation trade off. (MPRA Chapter No. 45021).Google Scholar

Copyright information

© The Author(s) 2019

Authors and Affiliations

  • Eliphas Ndou
    • 1
    • 3
    • 4
  • Thabo Mokoena
    • 2
  1. 1.Economic Research DepartmentSouth African Reserve BankPretoriaSouth Africa
  2. 2.Department of Economic, Small Business Development, Tourism and Environmental AffairsFree State Provincial GovernmentBloemfonteinSouth Africa
  3. 3.School of Economic and Business SciencesUniversity of the WitwatersrandJohannesburgSouth Africa
  4. 4.Wits Plus, Centre for Part-Time StudiesUniversity of the WitwatersrandJohannesburgSouth Africa

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