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Does monetary policy react asymmetrically to exchange rate misalignments? Evidence for South Africa

Author

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  • Lebogang Mateane

    (University of Cape Town)

  • Christian R. Proaño

    (Otto-Friedrich-Universität Bamberg
    Universidad San Francisco de Quito)

Abstract

This paper examines the impact of exchange rates on the monetary policy conduct of South Africa’s central bank (SARB). We also examine whether the SARB’s responses depend on whether South Africa’s exchange rate is undervalued or not. To investigate these questions, we incorporate a real exchange rate misalignment term into a forward-looking Taylor-type policy rule. We find empirical evidence supporting the hypothesis that the SARB responds asymmetrically to undervalued real exchange rates. Finally, a general result is that the SARB allocates more weight towards expected inflation stabilization, a lower weight towards output gap stabilization and the lowest weight towards the exchange rate.

Suggested Citation

  • Lebogang Mateane & Christian R. Proaño, 2020. "Does monetary policy react asymmetrically to exchange rate misalignments? Evidence for South Africa," Empirical Economics, Springer, vol. 58(4), pages 1639-1658, April.
    • Handle: RePEc:spr:empeco:v:58:y:2020:i:4:d:10.1007_s00181-018-1595-4
    DOI: 10.1007/s00181-018-1595-4
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    More about this item

    Keywords

    Monetary policy rules; Exchange rates; GMM estimation;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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