Has the Inflation Target Band Impacted the Natural Rate of Unemployment in South Africa? Evidence from the Accelerationist Philips Curve

Abstract

Has the inflation target band impacted the natural rate of unemployment (NAIRU) in South Africa based on the accelerationist Philips curve? Furthermore, to what extent can the expansionary monetary policy impact the unemployment rate above the NAIRU when using the 4.5 per cent inflation threshold? Evidence in this chapter suggests that monetary policy has a role to play in dealing with the unemployment problem above the NAIRU. This is contrary to evidence put forward that there is little or nothing that monetary policymakers can do. We find that price stability measured by inflation bands of inflation below 6 per cent leads to a lower NAIRU compared to when the inflation bands are not considered. Expansionary monetary policy lowers the unemployment rate above the NAIRU. Evidence shows that expansionary monetary policy lowers the unemployment rate and these effects are amplified by high GDP growth, investment growth, credit growth, the exchange rate appreciation and unit labour costs below the trend growth (alternatively, positive labour productivity shocks). However, the impact of expansionary monetary policy on the unemployment rate above the NAIRU is hampered by the exchange rate depreciation and high unit labour costs above the trend growth. This evidence shows that studies which do not control for the influence of inflation bands miss an important aspect in the determination of the NAIRU in South Africa. Such findings can lead to policymakers dismissing certain important policy tools which are also potent in lowering the unemployment rate.