Re‐Examining the Role of Structural Change and Nonlinearities in a Phillips Curve Model for South Africa

Abstract

Although studies generally find evidence of a Phillips curve‐type relationship in South Africa, uncertainty remains about the relevance of the model over a relatively long sample period, and whether conventional output gap measures are suitable proxies for demand pressure. This paper reviews research which shows that the Phillips curve model prevails over an extended sample, provided that the benchmark specifications include major structural changes in the balance‐of‐payments and labour market, and account for shifts in the root causes of inflation. When this is done, a linear specification with an output gap in levels correctly predicts the non‐trended inflation pattern over the period 1971(Q1)–1984(Q4), whereas a piecewise concave curve with an output gap in growth rates accurately forecasts the decelerating inflation pattern during 1986(Q1)–2001(Q2). A novel feature of the concave model is that it remains statistically robust and structurally stable when it is estimated until 2015(Q4). The concave model imparts a disinflationary bias, which suggests that monetary policy should be more expansionary during downswing phases of the business cycle and neutral during upswing phases. The analysis also considers how the shape of the Phillips curve might change if the balance‐of‐payments constraint on demand is relaxed in a significant way.

Pursuing the Phillips Curve in an African Monarchy: A Swazi Case Study

“…Both these results argue for a concave output-gap based Phillips curve specification which is consistent with argument for stabilization policies to be implemented during expansionary cycles to prevent the overheating of the economy. These arguments are re-iterated in the works of Turner (1995), Clark et al (1996), Debelle and Laxton (1997), Laxton et al (1999) and Nell (2006Nell ( , 2018. Further re-enforcing the validity of our findings are the positive statistics obtained for corresponding tests for asymmetries, regression diagnostics and stability analysis presented in Panels C and D.…”

“…The first two are the linear and nonlinear ARDL models estimated with gap variables extracted from the one-sided HP filter and the third is the nonlinear ARDL model with gap variables derived from the conventional twosided HP filter. Note that concerning the N-ARDL results, the model based on the one-sided HP filter argues for a traditional convex, unemployment-based Phillips curve in the short-run (i.e., U_gap+ > U_gap-) as found in Turner (1995), Clark et al (1996), Debelle and Laxton (1997), Laxton et al (1999) and Nell (2006Nell ( , 2018 whilst the two-sided HP filter argues for a concave, short-run Phillips curve as found in Stiglitz (1997) and Eisner (1997). However, judging from the long-run estimates recorded in Panel B, only the N-ARDL model with gap variables derived from the one-sided HP filter produces a significant negative coefficient on the U_gap+ variable.…”

“…Moreover, the N-ARDL model, on account of being an asymmetric extension of the ARDL model (Pesaran et al, 2001), allows us to explore the possibility of convexities and concavities frequently claimed to exist within the Phillips curve (Clark et al, 1996;Debelle & Laxton, 1997;Eisner, 1997;Laxton et al, 1999;Nell, 2006Nell, , 2018Stiglitz, 1997;Turner, 1995).…”

Endogenous monetary approach to optimal inflation–growth nexus in Swaziland

“…Firstly, there are nonlinear monetary policy rules, which assume that Central Banks react to deviations of inflation from it's target differently depending on whether inflation is in the “low” or “high” regime (Caporale et al , 2018) or whether an economy is in the upswing or downswing phase of the business cycle (Liu et al , 2018). Secondly, the nonlinear inflation–output growth relationship can be traced to the asymmetric Phillips curve, which describes a nonlinear response of inflation to output-gap fluctuations over the business cycle (Phiri (2016), Nell (2018) and Ho and Iyke (2019)). This asymmetric feature in the Phillips curve also compliments nonlinear monetary policy rules as it allows for the derivation of an asymmetric policy loss function faced by Central Banks.…”

The relationship between the short-term and long-term Phillips curve for the Czech Republic

“…The Phillips curve, which looks at the internal correlation of changes in employment and price levels, has been the focus of attention for quite some time. However, although there was a long history of macroeconomic research into the relationship between changes in price levels and output, it was not until 1958 that Phillips presented his comprehensive theory on the relationship between labor supply and price levels (Nell, 2018). Phillips, who was an economist from New Zealand, calculated a curve representing the dependency between the rate of change of unemployment and monetary wages since mathematical statistics using statistical data for Great Britain for the period 1861 to 1957.…”