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Monetary Policy and Inflation Modeling in a more Open Economy in South Africa

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  • Janine Aron

Abstract

South Africa in the 1990s became globally more integrated after years of isolation.� Opening the trade and capital accounts gave impetus to a monetary policy regime change to inflation targeting from 2000, after a costly transitional period of monetary mismanagement with low policy transparency.� Changes in openness can, however, disrupt the inflation forecasting on which targeting monetary policies depend.� This chapter demonstrates how the central bank's own producer price inflation equation in its core model can be improved by taking account of greater openness, using both innovative time-series openness measures and a more conventional measure.� The model has a greatly improved fit and stability over longer samples when also including the real exchange rate and the interest differential (making explicit the exchange rate channel of monetary transmission) and asymmetric food price inflation.� Moreover, there is a role for the level of the output gap rather than simply a short-run effect, as in the central bank's model.� This helps mitigate the arguments in current South African debate regarding the apparent unconcern of inflation targeting policy for the level of economic activity.

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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/2008-28.

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Date of creation: 01 Sep 2008
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Handle: RePEc:oxf:wpaper:wps/2008-28

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  1. Janine Aron & John Muellbauer, 2006. "Review of Monetary Policy in South Africa since 1994," CSAE Working Paper Series 2006-07, Centre for the Study of African Economies, University of Oxford.
  2. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  3. Aron, Janine & Muellbauer, John, 2002. "Interest Rate Effects on Output: Evidence from a GDP Forecasting Model for South Africa," CEPR Discussion Papers 3595, C.E.P.R. Discussion Papers.
  4. Lawrence Edwards, 2005. "Has South Africa Liberalised Its Trade?," South African Journal of Economics, Economic Society of South Africa, vol. 73(4), pages 754-775, December.
  5. Janine Aron & John Muellbauer, 2005. "Monetary Policy, Macro-stability and Growth," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 6(4), pages 123-147, October.
  6. Janine Aron & Ibrahim Elbadawi, 1999. "Reflections on the South African rand crisis of 1996 and its consequences," CSAE Working Paper Series 1999-13, Centre for the Study of African Economies, University of Oxford.
  7. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers.
  8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  9. S.A. Du Plessis, 2002. "EVALUATING THE SARB's INFLATION TARGET," South African Journal of Economics, Economic Society of South Africa, vol. 70(6), pages 982-1007, 09.
  10. Janine Aron & Ibrahim Elbadawi and Brian Kahn, 1997. "Determinants of the real exchange rate in South Africa," Economics Series Working Papers WPS/1997-16, University of Oxford, Department of Economics.
  11. Aron, Janine & Muellbauer, John, 2007. "Inflation Dynamics and Trade Openness," CEPR Discussion Papers 6346, C.E.P.R. Discussion Papers.
  12. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  13. Stan A. Plessis, 2005. "Proposals For Strengthening The Sarb'S Inflation Targeting Regime," South African Journal of Economics, Economic Society of South Africa, vol. 73(2), pages 337-354, 06.
  14. Janine Aron & Geeta Kingdon, 2007. "South African Economic Policy Under Democracy," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 16(5), pages 661-667, November.
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Cited by:
  1. Aron, Janine & Farrell, Greg & Muellbauer, John & Sinclair, Peter, 2010. "Exchange Rate Pass-through and Monetary Policy in South Africa," CEPR Discussion Papers 8153, C.E.P.R. Discussion Papers.
  2. Janine Aron, 2009. "Some Issues in Modeling and Forecasting Inflation in South Africa," Economics Series Working Papers CSAE WPS/2009-01, University of Oxford, Department of Economics.

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