Working Paper 189 - An Empirical Investigation of the Taylor Curve in South Africa

Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube () and Eric Olson ()

Working Paper Series from African Development Bank

Abstract: This paper investigates the policy trade-off between inflation volatility and output volatility, also referred to as the Taylor curve. In so doing, the paper assesses whether the Taylor curve has shifted over time, how demand and supply shocks affect the volatilities of inflation and the output gap, and the optimality of monetary policy using the Taylor principle. We use multivariate GARCH estimation. The results show that the Taylor curve has shifted over the sample period and shifted inwards under the inflation-targeting regime relative to prior regimes. Furthermore, the results indicate that economic growth performance is superior in periods in which the Taylor curve relationship holds. The effects of demand and supply shocks on both conditional volatilities are transitory. In policy terms, the inward shift of the Taylor curve and evidence based on the Taylor principle suggests optimal monetary policy settings or conduct during the inflation-targeting regime relative to earlier regimes.

Date: 2013-12-23
New Economics Papers: this item is included in nep-mac and nep-mon
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