Abstract
The achievement of the primary objective on a sustainable basis implies tough choices regarding the output and inflation trade-off. The policy choices open to policymakers are depicted in movements along the efficient policy frontier or the Taylor curve. This chapter estimates the Taylor curve for South Africa and explores whether the curve has shifted over time. In addition, we identify periods that were associated with minimum inflation and output volatility. Evidence shows that the Taylor curve shifted inward under the inflation targeting regime relative to the pre-inflation targeting period. The implication is that the inflation and output volatilities were minimised and macroeconomic performance was superior. Furthermore, positive shocks to inflation expectations, in particular increases above 6 per cent, shift the Taylor curve outward. The policy implication is that unanchored inflation expectations result in outward shift in the Taylor curve.
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Notes
- 1.
Synonymous to what King (2013) refers to as the value of the constrained discretion built into the inflation targeting regime.
- 2.
Cecchetti and Ehrmann (2002) argue that the economy can be hit by aggregate demand and supply shocks. Aggregate demand shocks move both inflation and output to the same direction. Supply shocks move inflation and output in the opposite direction. Since monetary policy can move output and inflation in same direction, it can be used to offset aggregate demand shocks. Hence in an aggregate supply shock authorities face a trade-off between output and inflation variability.
- 3.
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Ndou, E., Gumata, N. (2017). The Output and Inflation Trade-off in South Africa. In: Inflation Dynamics in South Africa. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-46702-3_3
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DOI: https://doi.org/10.1007/978-3-319-46702-3_3
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