Inflation targeting bands and the short-run output-inflation trade-off in a new Keynesian economics perspective: evidence from South Africa

Abstract

ABSTRACT The paper determines the effects of the 3–6% inflation targeting band (IT) band on short-run output-inflation trade-off in South Africa compared to inflation above 6%. In addition, we determine the region with the highest trade-off within the target band relative to its midpoint. The threshold model indicates that output-inflation tradeoff is higher within the existing IT band than above it. Within the 3–6% IT band, a higher output-inflation tradeoff is achieved when inflation is within the 3–4.5% IT band than in the 4.5–6% IT band. A 3–4.5% band will lead to bigger real effects.