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Inflation Targeting And The Fisher Effect In South Africa: An Empirical Investigation

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  • H.a. Mitchell-innes
  • M.j. Aziakpono
  • A.p. Faure

Abstract

The paper analyses the relationship between expected inflation and nominal interest rates during a period of inflation targeting in South Africa, "i.e." from 2000 to 2005. Specifically, it investigates the Fisher hypothesis that nominal interest rates move one-to-one with expected inflation, leaving the real interest rate unaffected. The analysis distinguishes between a short-run Fisher effect and a long-run Fisher effect. Using cointegration and error correction models (for monthly data for the period April 2000 to July 2005), it was found that the short-run Fisher hypothesis did not hold during the relevant period under the inflation targeting monetary policy framework in South Africa. This is attributed to a combination of the South African Reserve Bank's (SARB) control over short-term interest rates and the effects of the monetary transmission mechanism. The long-run Fisher hypothesis could not be confirmed in its strictest form: while changes in inflation expectations move in the same direction as the nominal long-term interest rate. This suggests that monetary policy has an influence on the real long-term interest rate, which has positive implications for general economic activity, thus confirming the credibility of the inflation targeting framework. Copyright (c) 2007 The Authors. Journal compilation (c) 2007 Economic Society of South Africa.

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Bibliographic Info

Article provided by Economic Society of South Africa in its journal South African Journal of Economics.

Volume (Year): 75 (2007)
Issue (Month): 4 (December)
Pages: 693-707

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Handle: RePEc:bla:sajeco:v:75:y:2007:i:4:p:693-707

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References

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  1. C Angelis & Mj Aziakpono & A Pierre Faure, 2005. "The Transmission Of Monetary Policy Under The Repo System In South Africa: An Empirical Analysis," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 73(4), pages 657-673, December.
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  5. Soderlind, Paul, 2001. "Monetary policy and the Fisher effect," Journal of Policy Modeling, Elsevier, Elsevier, vol. 23(5), pages 491-495, July.
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  7. Frederic S. Mishkin & John Simon, 1995. "An Empirical Examination of the Fisher Effect in Australia," NBER Working Papers 5080, National Bureau of Economic Research, Inc.
  8. Francisco Carneiro & Jose Angelo & C. A. Divino & Carlos Rocha, 2002. "Revisiting the Fisher hypothesis for the cases of Argentina, Brazil and Mexico," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(2), pages 95-98.
  9. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, Elsevier, vol. 52(3), pages 389-402, June.
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  11. Oscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, 2003. "Testing the Fisher Effect in the Presence of Structural Change: A Case Study of the UK,1961-2001," Economic Working Papers at Centro de Estudios Andaluces E2003_22, Centro de Estudios Andaluces.
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  15. Kate Phylaktis & David Blake, 1993. "The fisher hypothesis: Evidence from three high inflation economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 129(3), pages 591-599, September.
  16. Frederic S. Mishkin, 1991. "Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates," NBER Working Papers 3632, National Bureau of Economic Research, Inc.
  17. Tobias Knedlik, 2006. "Estimating Monetary Policy Rules For South Africa," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 74(4), pages 629-641, December.
  18. Darren Pain & Ryland Thomas, 1997. "Real Interest Rate Linkages: Testing for Common Trends and Cycles," Bank of England working papers 65, Bank of England.
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Cited by:
  1. Kose, Nezir & Emirmahmutoglu, Furkan & Aksoy, Sezgin, 2012. "The interest rate–inflation relationship under an inflation targeting regime: The case of Turkey," Journal of Asian Economics, Elsevier, vol. 23(4), pages 476-485.
  2. Andrew Phiri & Peter Lusanga, 2011. "Can asymmetries account for the empirical failure of the Fisher effect in South Africa?," Economics Bulletin, AccessEcon, vol. 31(3), pages 1968-1979.
  3. Riona Arjoon & Mariette Botes & Laban K. Chesang & Rangan Gupta, 2010. "The Long-Run Relationship between Inflation and Real Stock Prices: Empirical Evidence from South Africa," Working Papers 201028, University of Pretoria, Department of Economics.

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