Analysing inflation dynamics in South Africa: a new-keynesian approach

Abstract

Inflation is a monetary daily process that occurs over a period of time. Monetary policy is based on the Phillips Curve (PC) which is a tool used to analyse and describe inflation dynamics or the process of inflation. The PC basically shows that inflation and unemployment move in opposite directions; a negative relationship exists (Phillips, 1958). However, this relationship only occurs in the short run. Output gap or marginal cost measures can be used in the empirical specification of the PC instead of unemployment. These measures represent economic slack, which means that the correlation with inflation will change. The measure of slack will therefore determine the type of PC used. The different types are: traditional PC, the New Classical Phillips Curve (NCPC), the New Keynesian Phillips Curve (NKPC), and the Hybrid New Keynesian Phillips Curve (HNKPC). Inflation and monetary policies have gone through various changes over the years. These include implementing different regimes and policies to achieve stable prices and increase economic growth and employment. However, although monetary policies are significant in determining inflation, fiscal policy plays a minor role. Consequently the empirical analysis of this thesis focuses on fiscal variables.