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Has the SARB become more effective post inflation targeting?

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  • Rangan Gupta

    ()

  • Alain Kabundi

    ()

  • Mampho Modise

    ()

Abstract

This paper assesses the impact of a monetary policy shock on 15 key macroeconomic variables of South Africa, in the pre- and post-inflation targeting periods. For this purpose, we use a Factor-Augmented Vector Autoregressive (FAVAR) model comprising of 107 monthly time series over two equal sub-samples of 1989:01-1997:12 and 2000:01-2008:12. The results, based on impulse response functions, are in line with economic theory and indicate no puzzling effects often observed with small-scale monetary Vector Autoregressive (VAR) models. More importantly, we find that the ability of monetary policy in affecting key macroeconomic variables, including inflation, has increased in the post-targeting period. But, majority of the effects are insignificant, which could, however, also be due to the shorter-lengths of the sub-samples relative to the number of variables used in this study, rather than depicting the inability of monetary policy to significantly affect the South African economy.

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File URL: http://hdl.handle.net/10.1007/s10644-009-9083-7
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Bibliographic Info

Article provided by Springer in its journal Economic Change and Restructuring.

Volume (Year): 43 (2010)
Issue (Month): 3 (August)
Pages: 187-204

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Handle: RePEc:kap:ecopln:v:43:y:2010:i:3:p:187-204

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Web page: http://www.springerlink.com/link.asp?id=113294

Related research

Keywords: Monetary policy shock; Inflation targeting; Impulse response functions; FAVAR; C32; E52; E58;

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  1. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 869-902, August.
  2. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
  3. Martha Banbura & Domenico Giannone & Lucrezia Reichlin, 2008. "Large Bayesian VARs," Working Papers ECARES 2008_033, ULB -- Universite Libre de Bruxelles.
  4. Gupta, Rangan & Jurgilas, Marius & Kabundi, Alain, 2010. "The effect of monetary policy on real house price growth in South Africa: A factor-augmented vector autoregression (FAVAR) approach," Economic Modelling, Elsevier, vol. 27(1), pages 315-323, January.
  5. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
  6. Rangan Gupta & Alain Kabundi, 2010. "The effect of monetary policy on house price inflation: A factor augmented vector autoregression (FAVAR) approach," Journal of Economic Studies, Emerald Group Publishing, vol. 37(6), pages 616-626, September.
  7. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
  8. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  9. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
  10. James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc.
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