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Inflation and output forecasts for South Africa: monetary transmission implications

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  • Janine Aron
  • John Muellbauer

Abstract

South Africa’s recent adoption of inflation targeting increases the need for good forecasting models of inflation and models for understanding the monetary transmission mechanism. This paper presents multi-step models for inflation and output, four-quarters ahead. The inflation model has an equilibrium correction form, which clarifies medium- or longer-run influences on inflation, including opening the economy to foreign imports. The model confirms the importance of the output gap and the exchange rate for forecasting inflation; and the influence from recent changes in the current account surplus to GDP ratio, which is also sensitive to short-term interest rates. However, a rise in interest rates can also raise inflation in the short-run, via a rise in mortgage interest payments (a component of the consumer price index). The unfortunate policy implications for South Africa are discussed. The output model uses a stochastic trend to measure long-run changes in the capacity to produce. On the demand side there are important negative interest rate effects, though these have been altered by changes in the monetary policy regime. The trade surplus and government surplus to GDP ratios, which also respond to interest rate changes, and improvements in the terms-of-trade, all have a positive effect on future output.

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Bibliographic Info

Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2000-23.

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Date of creation: 2000
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Handle: RePEc:csa:wpaper:2000-23

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  1. Clements,Michael & Hendry,David, 1998. "Forecasting Economic Time Series," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521632423.
  2. Janine Aron & John Muellbauer & John Muellbauer, 2000. "Personal and Corporate Saving in South Africa," Economics Series Working Papers, University of Oxford, Department of Economics WPS/2000-21, University of Oxford, Department of Economics.
  3. Clements, Michael P. & Hendry, David F., 1996. "Multi-Step Estimation for Forecasting," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 447, University of Warwick, Department of Economics.
  4. Oriana Bandiera & Gerard Caprio & Patrick Honohan & Fabio Schiantarelli, 2000. "Does Financial Reform Raise or Reduce Saving?," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 82(2), pages 239-263, May.
  5. Weiss, Andrew A., 1991. "Multi-step estimation and forecasting in dynamic models," Journal of Econometrics, Elsevier, Elsevier, vol. 48(1-2), pages 135-149.
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Cited by:
  1. Janine Aron & John Muellbauer & Coen Pretorius, 2004. "A Framework for Forecasting the Components of the Consumer Price," Development and Comp Systems, EconWPA 0409054, EconWPA.
  2. Christopher Bowdler & Eilev S. Jansen, 2004. "Testing for a time-varying price-cost markup in the Euro area inlation process," Working Paper, Norges Bank 2004/9, Norges Bank.
  3. Janine Aron & John Muellbauer, 2002. "Interest Rate Effects on Output: Evidence from a GDP Forecasting Model for South Africa," IMF Staff Papers, Palgrave Macmillan, Palgrave Macmillan, vol. 49(Special i), pages 185-213.
  4. Christopher Bowdler, 2004. "Openness and the output-inflation tradeoff," Money Macro and Finance (MMF) Research Group Conference 2003, Money Macro and Finance Research Group 7, Money Macro and Finance Research Group.
  5. Christopher Bowdler & Luca Nunziata, 2004. "A note on the determinants of inflation starts in the OECD," Economics Papers, Economics Group, Nuffield College, University of Oxford 2004-W11, Economics Group, Nuffield College, University of Oxford.
  6. Christopher Bowdler & Adeel Malik, 2005. "Openness and inflation volatility: cross-country evidence," CSAE Working Paper Series, Centre for the Study of African Economies, University of Oxford 2005-08, Centre for the Study of African Economies, University of Oxford.
  7. Bowdler, Christopher & Jansen, Eilev S., 2004. "A markup model of inflation for the euro area," Working Paper Series, European Central Bank 0306, European Central Bank.

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