Monetary policy, inflation, unemployment and the Phillips Curve in South Africa

Abstract

Inflation and unemployment are perhaps the two most important challenges that face the South African economy of today. Firstly, the study examines the relationship between monetary policy and the two economic fundamentals (inflation and unemployment), using the VEC modeling technique. The model regresses the monetary policy variable against inflation and unemployment growth over the period 1980-2008. The results suggest that (1) there is a long run relationship between inflation and unemployment (2) monetary policy reacts more to variations in inflation compared to variations in unemployment. Secondly, the relationship between inflation and unemployment as explained by the Phillips curve is investigated. The results show that there is a positive relationship between inflation and unemployment.