How firms and experts view the Phillips curve: evidence from individual and aggregate data from South Africa
Last Modified Date:
2021-04-09, 12:09 PM
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A unique survey of firms and financial analysts in South Africa provides data about their inflation expectations as well expectations concerning other critical macroeconomic and financial variables. Surveys have been conducted since the introduction of inflation targeting in 2000. The data allow researchers to obtain indications whether respondents see links between key aggregates in the manner hypothesised by economic theory. Given the role and importance of the Phillips curve, and ongoing international interest in whether the underlying trade-off between the consumer price index (CPI) or wage inflation and real economic activity continues to operate, we estimate a wide range of Phillips curves for South Africa. Surveys of both firms and financial analysts reveal a change in behaviour beginning after the global financial crisis (GFC). Thereafter, inflation expectations become less volatile and tend to remain at the top of the SARB’s inflation targeting band, though there is some evidence of movement toward the midpoint of the target band beginning in 2018. There are significant differences in behaviour in how financial analysts see future economic activity relative to their counterparts in firms. There is also evidence of diversity in expectations across different industrial sectors. As in much of the advanced world, Phillips curves in South Africa have become flatter. While both forward- and backward-looking elements drive firms’ and financial analysts’ views of current inflation, backward-looking factors play a relatively larger role among firms surveyed. Wage-based Phillips curves are able to explain rising real wage growth in South Africa as an over-reaction to expected and past inflation and wage growth, at least since the GFC.