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The Output Gap, Exchange Rate Depreciation Shock and Inflation: Non-Linear Effects and Implications for Monetary Policy

  • Eliphas Ndou
  • Nombulelo Gumata
Chapter
  • 388 Downloads

Abstract

This chapter looks at the role of the output gap in the exchange rate pass-through (ERPT) to inflation. The objective is to examine the extent to which the output gap non-linearly impacts macroeconomic relationships. Various measures of the output gap confirm that its relationship with inflation varies and is negative post-2009. This means that post-2009 inflation does increase in the presence of a negative output gap. In addition, the output gap threshold indicates that the level of the output gap affects the response of inflation to the exchange rate depreciations shocks. Inflation increases more in the high output gap regimes. The output gap also impacts the policy rate adjustments to inflation shocks. As a result the policy rate responses differ between the low and high output gap regimes. The repo rate is slightly increased to positive inflationary pressures in the low output gap regime, in contrast to the aggressive adjustment in the high output gap regimes. Policymakers do act but are mindful of GDP growth conditions.

Evidence indicates that the public spending effects are larger during the extreme recessionary periods than in great expansionary regimes. The policy implication is that there is a role for countercyclical fiscal policy.

Keywords

Output Gap Exchange Rate Depreciation Shock Exchange Rate Pass-through (ERPT) Policy Rate Adjustment Positive Inflationary Pressures 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© The Author(s) 2017

Authors and Affiliations

  • Eliphas Ndou
    • 1
  • Nombulelo Gumata
    • 1
  1. 1.South African Reserve BankPretoriaSouth Africa

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