A sticky information Phillips curve for South Africa

Monique Reid and Gideon du Rand ()
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Gideon du Rand: Department of Economics, University of Stellenbosch

No 22/2013, Working Papers from Stellenbosch University, Department of Economics

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.

Keywords: South Africa; sticky information; Phillips curve (search for similar items in EconPapers)
JEL-codes: E3 E31 E52 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-afr, nep-for and nep-mac
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https://www.ekon.sun.ac.za/wpapers/2013/wp222013/wp-22-2013.pdf First version, 2013 (application/pdf)

Related works:
Journal Article: A Sticky Information Phillips Curve for South Africa (2015)
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