A sticky information Phillips curve for South Africa

Stellenbosch Working Paper Series No. WP22/2013
 
Publication date: 2013
 
Author(s):
[protected email address] (Department of Economics, University of Stellenbosch)
[protected email address] (Department of Economics, University of Stellenbosch)
 
Abstract:

Mankiw and Reis (2002) propose the Sticky Information Phillips Curve as an alternative to the standard New Keynesian Phillips Curve, to address empirical shortcomings in the latter. In this paper, a Sticky Information Phillips curve for South Africa is estimated, which requires data on expectations of current period variables conditional on sequences of earlier period information sets. In the literature the choice of proxies for the inflation expectations and output gap measures are usually not well motivated. In this paper, we test the sensitivity of model fit and parameter estimates to a variety of proxies. We find that parameter estimates for output gap proxies based either on a simple Hodrik-Prescott filter application or on a Kalman filter estimation of an aggregate production function are significant and reasonable, whereas methods employing direct calculation of marginal costs do not yield acceptable results. Estimates of information updating probability range between 0.69 and 0.81. This is somewhat higher than suggested by alternative methods using micro-evidence (0.65 – 0.70 (Reid, 2012)). Lastly, we find that neither parameter estimates nor model diagnostics are sensitive to the choice of expectation proxy, whether it be constructed from surveyed expectations or the ad hoc VAR based forecasting methods.

 
JEL Classification:

E31, E3, E52

Keywords:

South Africa, sticky information, Phillips curve

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14 October 2019
While incoming data on the global economy remains downbeat, the mood was lifted last week after progress was made on US-China trade talks and Brexit negotiations. On the domestic data front, mining and manufacturing data for August added to growing evidence that real GDP growth likely slowed significantly in 2019Q3 after the nice rebound recorded in...

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