To What Extent Does the Output-Inflation Trade-Off Exist in South Africa and Is It Impacted by the Six Per Cent Inflation Threshold?

Abstract

The chapter determines the extent to which elevated nominal volatilities make expansionary policy ineffective in achieving maximum real output and low inflation. Evidence shows that elevated nominal demand and inflation volatility shocks reduce the output-inflation trade-off, and this reduces policy effectiveness in achieving desirable outcomes. The magnitudes of the reduction in the output-inflation trade-off effects are larger in the high inflation regime than in the low inflation regime. In policy terms, this evidence confirms the new Keynesian hypothesis, which implies that demand policy is less effective in countries with both high inflation and demand volatilities. Therefore, policymakers should minimize the volatility of inflation when implementing demand management policy and ensure that price stability is enforced to minimize inflation volatility.