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Estimating Monetary Policy rules for South Africa

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  • Janine Aron
  • John Muellbauer

Abstract

South African monetary policy has experienced major shifts, with three broad monetary policy regimes since the 1960s. This paper analyses the conduct of monetary policy, describing the historical record and institutions of monetary policy, and formally modelling extended Taylor rules for interest rate policy formation. Our principal interest is in the second regime (prior to inflation targeting), when the short-term interest rate first became the main monetary policy instrument, with reference to monetary targets and an eclectic set of economic indicators. Policy was opaque in this regime, and has never been studied in the context of rigorous empirical models. Taylor rules, augmented for foreign interest rate influences and interest rate smoothing, and based either on forecast, or actual, inflation and output gap measures, poorly describe the behavior of the discount rate. A satisfactory model includes the deviation of money growth from target in the rule and controls for the extensive financial liberalisation occurring in the period. In practice, the central bank emphasized current inflation, giving a low weight to the output gap. We find weak evidence for structural breaks reflecting competing balance of payments considerations.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2001-07.

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Date of creation: 01 Jan 2001
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Handle: RePEc:oxf:wpaper:wps/2001-07

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References

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  1. John B. Taylor, 1995. "The monetary transmission mechanism: an empirical framework," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 95-07, Federal Reserve Bank of San Francisco.
  2. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(2), pages 97-116, Spring.
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Mar.
  4. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  5. Hendry, David F, 1985. "Monetary Economic Myth and Econometric Reality," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 1(1), pages 72-84, Spring.
  6. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Aug, pages 9-110.
  7. Muellbauer, John N J, 1996. "Income Persistence and Macro-Policy Feedbacks in the U.S," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(4), pages 703-33, November.
  8. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
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Cited by:
  1. Janine Aron & John Muellbauer, 2007. "Review of Monetary Policy in South Africa since 1994," Journal of African Economies, Centre for the Study of African Economies (CSAE), Centre for the Study of African Economies (CSAE), vol. 16(5), pages 705-744, November.
  2. Janine Aron & John Muellbauer, 2006. "Housing Wealth, Credit Conditions and Consumption," Economics Series Working Papers WPS/2006-08, University of Oxford, Department of Economics.
  3. Peter Aling & Shakill Hassan, 2012. "No-Arbitrage One-Factor Models Of The South African Term Structure Of Interest Rates," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 80(3), pages 301-318, 09.
  4. Aron, Janine & Muellbauer, John, 2006. "Review of Monetary Policy in South Africa: 1994-2004," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5831, C.E.P.R. Discussion Papers.
  5. Muellbauer, John & Murphy, Janine Aron & Ant & Aron, Janine & Murphy, Anthony, 2007. "Housing Wealth, Credit Conditions and Consumption," ERES, European Real Estate Society (ERES) eres2007_257, European Real Estate Society (ERES).
  6. Tobias Knedlik, 2006. "Signaling Currency Crises in South Africa," IWH Discussion Papers, Halle Institute for Economic Research 19, Halle Institute for Economic Research.

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