THE SOUTH AFRICAN PHILLIPS CURVE: HOW APPLICABLE IS THE GORDON MODEL?

Is there a Phillips curve relationship present in South Africa and if so, what form does it take? Traditionally the method to establish whether or not there is a relationship between the output gap and the change in inflation is merely to regress the latter on the former. This yields the well‐known augmented Phillips curve. However, Gordon has argued that this specification of the Phillips curve produces biased results. Instead, he puts forward and estimates successfully for several industrialised countries his so‐called triangular model that tests for hysteresis and inertia in the behaviour of inflation, as well as the impact on inflation of changes in the output level. This paper considers whether or not Gordon's triangle model is applicable to South Africa, i.e. are hysteresis and inertia present in South Africa? In addition, in an attempt to find a better estimation of the output gap, the paper also experiments with alternative ways to estimate the long‐run output level, including the standard HP‐filter, as well as a production function approach.     

EVALUATING THE PERFORMANCE OF SOUTH AFRICAN ECONOMICS DEPARTMENTS

Over the past decade, economics departments in South Africa have seen major changes and a certain level of disruption. Much of this can be attributed to the integration of our discipline into the global arena after a period of academic isolation. This paper presents a survey of economics departments and covers everything from staff profiles and qualifications to curricula, and research output. This paper indicates that there has been some improvement in the state of economics at South African universities since 2003 when the previous survey was conducted. Research output is largely up as is the proportion in international journals, and more researchers are producing in leading international economics publications. However, the gap between South African economics departments and their international counterparts remains large.     

SHOULD SOUTH AFRICA HAVE A FISCAL RULE?

Over the past three decades many countries have struggled to find solutions to their persistent public sector deficits. For some the solution to this problem seemingly became the adoption of fiscal rules. This paper considers the applicability of one such rule, namely the output‐sensitive deficit rule of Taylor, and in particular its applicability to South Africa. The paper shows that its applicability in developing countries such as South Africa might be limited due to higher output volatility that may cause output‐sensitive deficit rules such as the Taylor rule to become more volatile. Such volatility in the deficit/GDP ratio may cause fears that government may not be able to maintain the stability of the debt/GDP ratio, thereby again introducing fiscal unsustainability. To address this problem the paper augments the Taylor rule to reduce the volatility in the public debt/GDP ratio and demonstrates how these rules would have performed in South Africa. It concludes that the augmented fiscal rule might contribute to both fiscal sustainability and economic stability in South Africa.     

ADJUSTING SOUTH AFRICA'S FISCAL BALANCE FOR TERMS-OF-TRADE EFFECTS

Standard output gap‐based calculations and interpretations of the cyclical component of the fiscal balance may convey a misleading picture in countries such as South Africa which experience substantial movements in their terms of trade. This paper therefore adjusts South Africa's general government primary balance for terms‐of‐trade effects by means of an alternative calculation of the transitory component based on a measure of the real income gap rather than the real output gap. The results indicate that measures of the cyclical component of the budget balance based on real income and real output gaps generally yield broadly similar results over history, but during exceptional periods of rapid changes in commodity prices, the measures can be very different.     

Sectoral Growth and Poverty Alleviation: A Multiplier Decomposition Technique Applied to South Africa

How does an increase in a sector's output affect poverty alleviation? In this paper a multiplier decomposition for a socioeconomic system represented by a Social Accounting Matrix (SAM) is used to study this linkage. The decomposition applied to South Africa reveals that growth in agriculture, services and some manufacturing sectors can alleviate poverty for the black African population. For sectoral growth to be effective, however, the need for appropriate skill acquisition for the poor must be addressed directly. Only long-term policies geared towards improving both economic growth and the human capital stock of the poor can lead to significant poverty alleviation.     

Estimating South Africa's Output Gap and Potential Growth Rate

This paper estimates the potential output of the South African economy using several filters. We demonstrate that potential output measures are very sensitive to the different methodologies. We also provide estimates of South Africa's potential growth rate over the 1960–2015 period. Current estimates of the potential growth rate fall in the 1.9%–2.3% range. However, the evidence suggests that the rate is under considerable downward pressure. South African potential growth may be headed toward the 1% range. The strongest decline is in the real sectors of the economy (Manufacturing, Mining), the greatest resilience in the service sectors (financial in particular).     

Revisiting the Exchange Rate Pass‐Through to Inflation in Africa’s Two Largest Economies: Nigeria and South Africa

This paper revisits the exchange rate pass‐through (ERPT) to inflation in Nigeria and South Africa by incorporating structural breaks and using time series variables, namely the consumer price index, nominal effective exchange rate, gross domestic product, and crude oil price. Based on the Maki cointegration test and a flexible estimation approach of the Autoregressive Distributed Lag (ARDL) model, our empirical evidence suggests that the long‐ and short‐run ERPT to inflation is complete for Nigeria, while for South Africa it is incomplete both in the long run and short run. This result indicates that prices are stickier in South Africa compared to Nigeria. The comparison between Nigeria and South Africa confirms the role of inflation targeting and central bank credibility on the ERPT. The results divulge further that output growth in Nigeria increases inflation in the long run while it is anti‐inflationary in the short run. For South Africa, the effect of output growth is negatively insignificant. In addition, the long‐run effect of oil price is negative and significant for Nigeria, while for South Africa the short‐run effect of oil price is positive and significant. Therefore, the findings of this paper will assist the monetary authorities to achieve monetary policy objectives.     

CYCLICAL UNEMPLOYMENT AND CYCLICAL OUTPUT: AN ESTIMATION OF OKUN'S COEFFICIENT FOR SOUTH AFRICA

Persistently high unemployment in South Africa, especially in the face of improved economic conditions since 1994, begs the question: Does unemployment in South Africa respond to changes in output? Okun's law refers to the inverse relationship that exists between cyclical output and cyclical unemployment. This paper estimates Okun's coefficient for the South African economy, using annual data from 1970‐2005. Output and unemployment are decomposed into their trend and cyclical components, using a variety of detrending methods. The presence of structural breaks in Okun's relationship is also investigated, while cointegration analysis was also considered. Evidence of a statistically significant relationship between cyclical output and cyclical unemployment are found in both symmetric (estimates range from ?0.77 to ?0.16) and asymmetric (estimates range from ?0.77 to ?0.18) specifications of Okun's law, irrespective of the detrending technique. However, cyclical unemployment constitutes only a relatively small fraction of total (observed) unemployment, which implies that a more expansionary macroeconomic policy stance might only have a limited impact on total unemployment in South Africa.     

Measuring Potential Output for the South African Economy: Embedding Information About the Financial Cycle

Borio et al. show that information embedded in the financial cycle can serve to improve measures of potential output and output gaps. They show that incorporating information on the financial cycle yields measures of potential output and output gaps for the United States, United Kingdom and Spain that are estimated more precisely and are more robust in real time. With its well‐developed financial markets and relatively open capital markets, the South African economy is potentially susceptible to the build‐up of the sort of financial imbalances that characterised the recent financial crisis. Using the framework developed in Borio et al., a finance‐neutral measure of the output gap is estimated for South Africa. The traditional Hodrick–Prescott filter is extended to incorporate information on credit and property prices. Including financial cycle proxies result in output gaps that are estimated more precisely and are more robust to data revisions and the arrival of new data points (i.e. estimated output gaps are more robust in real time), while also reflecting the impact of financial variables on economic activity. As such, the estimated finance‐neutral output gap seems to represent a more appropriate measure on which to base monetary policy decisions.     

ESTIMATING MONETARY POLICY RULES FOR SOUTH AFRICA

The paper combines the estimation of the Monetary Conditions Index (MCI) with the theoretic modelling of optimal monetary policy in South Africa. The idea that monetary policy is not only interested in optimal monetary conditions but also in external stability, provides the basis for the analysis. The paper introduces the concept of the MCI and estimates the relative influence of interest rates and exchange rates on the output gap. The estimated weights are 1.9:1. This estimation results is used to specify operating target rules for South African monetary policy.     

Comparing quotas with VERs: A three-region,North-South-NICs macroeconomic analysis

The paper presents a three-region macro-economic model of the North, South and NICs. Discriminatory commercial policy is undertaken by the North against the South and the NICs: a quota is used against the former and a VER against the latter. Contrary to most of the existing literature on macro-commercial policy, the initiator of the policy (the North) could gain from such a mixed commercial policy in terms of output and employment. This would normally be at the expense of the South (lower terms of trade), whereas the terms of trade for the NICs could improve, although not necessarily.     

THE CYCLICALITY OF MONETARY AND FISCAL POLICY IN SOUTH AFRICA SINCE 1994

This paper uses a structural vector‐autoregression approach to discuss the cyclicality of fiscal and monetary policy in South Africa since 1994. There is substantial South African literature on this topic, but much disagreement remains. Though not undisputed, there is growing consensus that monetary policy has contributed to the remarkable stabilisation of the South African economy over this period. The evaluation of the role of fiscal policy in stabilisation has been less favourable and there is little evidence that a countercyclical fiscal stance was a priority over this period. This paper considers these issues in an empirical framework that addresses some of the shortcomings in the literature. Specifically, it constructs a structural model in contrast with the reduced form models typically used in the South African literature, incorporates the dynamic interaction between monetary and fiscal shocks on the demand side and supply shocks on the other, and avoids controversy over “neutral” base years and the size of fiscal elasticities. The model confirms the consensus on monetary policy, finding it to have been largely countercyclical since 1994. On fiscal policy, this paper finds evidence of pro‐cyclicality, especially in the more recent period, though the policy simulations suggest that the pro‐cyclicality of fiscal policy has had little destabilising impact on real output.     

Infrastructure and Growth in South Africa: Direct and Indirect Productivity Impacts of 19 Infrastructure Measures

Empirical explorations of the growth and aggregate productivity impacts of infrastructure have been characterized by ambiguous (countervailing signs) results with little robustness. This paper, utilizing panel data for South African manufacturing over the 1970–2000 period, and a range of 19 infrastructure measures, explores the question of infrastructure endogeneity in output equations. The paper develops an instrumentation strategy generalizable to other contexts. Controlling for the possibility of endogeneity in the infrastructure measures renders the impact of infrastructure capital not only positive, but of economically meaningful magnitudes.     

What does South Korean inflation targeting target?

This paper characterises South Korean monetary policy in the period of explicit inflation targeting that started in 1999. We calculate Bank of Korea's parameters in the policy objective function, conditional on an estimated macro-model. We show that this central bank appears to have pursued optimal policy geared towards achieving price stability, while displaying a considerable degree of interest rate smoothing. In addition, the central bank loss function is estimated to include negligible weights on output and exchange-rate variability.     

Chinese universities economic research output 2000–2010

This study analyses the publishing output of Chinese authors in a group of leading economics journals over the period 2000–2010. We find that the output distribution across institutions is unevenly distributed, but within institutions there is a relatively more even spread. Research output has more than doubled over the period and is comparable with South Korean and Japanese output. Authors associated with US institutions have been an important source of research output growth. However, domestic output has also been increasing. Econometrics is the main field of output growth.     

Baumol's Law and Verdoorn's Regularity

This paper tests the laws of Verdoorn and Baumol for the Netherlands in order to assess whether these laws provide an appropriate framework to interpret developments of output, employment, and wages and prices in the manufacturing industry and the services sector. The empirical evidence is not conclusive with respect to Verdoorn's law, but strongly supportive of Baumol's law.     

South Africa's titanium industrial policy: A product space perspective

South Africa is a globally significant player in the titanium raw mineral production industry but does not play a large role in its downstream mineral processing. Since downstream activities generate much higher value added, the government has sought to support the end-to-end titanium value chain to capture more value from raw titanium before export through ‘beneficiation’-related policies. This paper applies the input–output product space methodology to generate an overview of those sub-sectors within the titanium value chain that are likely to support long-term economic growth in South Africa. We then evaluate whether the selected global value chain activities are supported by the current industrial policy and/or whether a focus on currently excluded global value chain activities is recommended. Our results confirm that although beneficiation appears to make sense in the titanium industry in South Africa, it should (from a product space perspective) be applied neither automatically nor sequentially moving down the value chain. The paper concludes with the shortcomings of the approach and various avenues for future research.     

Effects of foreign and domestic economic policy uncertainty shocks on South Korea

This paper investigates the effects of foreign and domestic economic policy uncertainty shocks on South Korea via structural VARs. The results show that both foreign and domestic policy uncertainty shocks exert negative and significant impacts on South Korea. Foreign economic policy uncertainty shocks are found to be more dominant than domestic economic policy uncertainty shocks in influencing the Korean output. The results also indicate that economic policy uncertainty that originates from foreign countries is a significant source of disturbance to the Korean economy, but domestic policy uncertainty plays a rather limited role in explaining Korean business fluctuations.     

Rethinking township tourism: Towards responsible tourism development in South African townships

Township tourism in South Africa has grown in popularity since 1994 and is considered by some to be an appropriate mechanism for stimulating local economic development. This paper suggests, however, that it is not necessarily a viable or responsible development option, since it does not automatically ensure pro-poor benefits or enhance community development. Primary research conducted in Soweto to understand visitor demand and tourism stakeholder perspectives suggests there is a demand for responsible tourism in townships. The paper contributes to South African debates about the developmental role of tourism, township tourism and local economic development, responsible tourism, and the related policy implications. It calls for responsible township tourism development in which local authorities play a vital role and recommends the development of township tourism attractions, with a focus on culture and heritage, to create unique visitor experiences.     

Inflation-Output Trade-Off in South Africa: Is the Phillips Curve Symmetric?

This study sets out to investigate whether the inflation-output trade-off in South Africa is symmetric or asymmetric; and if asymmetric, whether it is convex or concave. A New Keynesian dynamic stochastic general equilibrium model calibrated on South African data reveals that a negative demand shock reduces inflation and output while a positive demand shock of the same magnitude leads to a smaller increase in inflation and a larger increase in output, indicating that the inflation–output relationship in the country is concave asymmetric. These findings corroborate estimation results of the inflation-expectations augmented Phillips curve conducted using difference GMM on quarterly data.