STRUCTURAL CHANGE AND NONLINEARITIES IN A PHILLIPS CURVE MODEL FOR SOUTH AFRICA

The main objective of this article is to reexamine the role of the Phillips curve for monetary policy analysis in South Africa by augmenting the model for major structural changes in the balance-of-payments and labor market. The main findings show that a linear Phillips curve with an output gap in levels accurately describes South Africa's nontrended inflation experience during 1971(Q1)–1984(Q4), whereas a piecewise concave curve with an output gap in growth rates correctly predicts the decelerating inflation pattern during 1986(Q1)–2001(Q2). The concave curve after 1985 imparts a deflationary bias that requires expansionary demand-side policies to stabilise the inflation rate. An important corollary is that expansionary demand-side policies can raise the average growth rate of the output gap over time without sacrificing stabilization objectives. (JEL C22, E3, E52 )