Inflation, output and unemployment trade-offs in Sub-Saharan Africa countries

ABSTRACT

This paper examines the behaviour of inflation, output, and unemployment in Sub-Saharan Africa (SSA) countries and shows that the predictions of the Phillips curve and Okun’s law are valid in the short run. In the long run however, the Okun’s law coefficient declines greatly and turns positive while the Phillips curve phenomenon gravitates towards the New Keynesian Phillips Curve (NKPC) but with a negative relationship. The evidence echoes Friedman’s proposition of a temporary trade-off between inflation and unemployment but no permanent trade-off. The output-unemployment relationship suggests that the long-term growth revival in SSA was neither inclusive nor pro-poor.

KEYWORDS:

• Phillips curve
• Okun’s law
• Panel ARDL

JEL:

• E24
• E31

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Inflation rates in SSA have declined in the recent decade, staying around rates observed in low income and least developed countries but above the records for the East Asia and Pacific region (Figure A2).

2. Unemployment rates averaged about 6.14% in SSA over the last two and half decades relative to an average unemployment rate of 5.03% for low-income countries, 4.29% for least developed countries and 3.97% for the East Asia and Pacific region (Figure 1 A).

3. Wage increases result from labour union pressures and employers’ desire to induce further hours in response to the improved demand.

4. For empirical implementation of the NKPC, the real marginal cost has been proxied using a measure of the output gap (the deviation of output from its potential level).

5. The data are available on an annual basis and were interpolated to quarterly series using the procedures discussed in the first section (Data) of chapter 2 (Data and methods).

6. Olu and Afeikhena (2014) show that the contributions of agriculture to GDP in Africa increased slightly while the contributions of manufacturing continued to decline.

Additional information

Notes on contributors

Johnson Worlanyo Ahiadorme

Johnson Worlanyo Ahiadorme has an academic and professional background in economics and finance and is involved in theoretical and empirical research in the areas of macroeconomics, macro-finance, monetary and fiscal policies, financial economics and development economics.