Central banks estimate the relationship between economic slack and inflation (‘the Phillips curve’) to assess the trade-off between reducing inflation and potential loss of output. Today’s post shows that a simple measure of the Phillips curve has flattened since the global financial crisis. This means monetary policy effectiveness has weakened and much larger policy rate changes are needed to bring down inflation. Our Journal of Macroeconomics paper suggests that post-global financial crisis funding spread changes have lowered the degree of interest rate pass-through in South Africa, something that should be monitored when analysing policy pass-through. This conclusion also depends on whether you specify the relationship to output or employment, and how one measures capacity pressures and core inflation.
Footnote
The chart above looks similar if instead expressed in terms of core inflation published by Statistics South Africa or quarter-on-quarter inflation rates.
