The Output-Inflation Trade-off in African Less Developed Countries

This paper investigates the nature of the short-run output-inflation trade-off and policy effectiveness in African less developed countries. Using a sample of thirteen countries over the period 1960-98, cointegration and error correction modelling suggest that the impacts on inflation and real output growth from a shock to nominal aggregate demand will be of the ratio one-sixth to five-sixths. Furthermore, this study finds that the short-run potency of demand-side policy on inflation (real output growth) is positively (inversely) related to the variability of nominal income shocks rather than the underlying rate of inflation. While the speed of adjustment towards long-run equilibrium between price and nominal output is fairly sluggish, it is concluded that the New Classical perspective on the trade-off is applicable in the case of African economies. The New Keynesian perspective, which emphasises wage and price rigidities and policy effectiveness, is probably of lesser relevance