Do Inflation Regimes Influence the Size of Second-Round Effects on Private Sector Wage Inflation Following an Exchange Rate Depreciation Shock?

Abstract

Do inflation regimes influence the size of second round effects on private sector wage inflation following an exchange rate depreciation shock? Evidence shows the second-round effects of exchange rate depreciation shock are much smaller in the low consumer price inflation regime in relation to those in the high inflation regime. The findings further show that in the low consumer price inflation regime, the repo rate tends to be much lower than that level that would prevail if second round effects were not considered. This suggests that weak second round effects in low inflation regimes matter. Therefore, policymakers should be cognisant that low and high consumer price inflation regimes impact nonlinearly the size of second-round effects and this can lead to different conclusions and policy implications.