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What is the SARB's inflation targeting policy, and is it appropriate?

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  • Ellyne, Mark
  • Veller, Carl
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    Abstract

    Since its adoption of inflation targeting in 2000, the South African Reserve Bank has been accused of placing too great an emphasis on meeting its inflation target, and too small an emphasis on the high rate of unemployment in the country. On the other hand, the SARB has regularly missed its inflation target. We attempt to characterise the SARB's inflation targeting policy by analysing the Bank's interest rate setting behaviour before and after the adoption of inflation targeting, making use of Taylor-like rules to determine whether the SARB has emphasised inflation, the output gap, the real exchange rate, and asset price deviations in its monetary policy. We find that the SARB has significantly changed its behaviour with the adoption of inflation targeting, and show that the SARB runs a very flexible inflation targeting regime, with strong emphasis on the output gap. Indeed, we find evidence that the emphasis on inflation is too low, and potentially conducive to instability in the inflation process.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42134.

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    Date of creation: 30 Aug 2011
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    Handle: RePEc:pra:mprapa:42134

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    Keywords: South Africa; monetary policy; inflation targeting;

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    1. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
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    21. Ruthira Naraidoo & Rangan Gupta, 2009. "Modelling monetary policy in South Africa: Focus on inflation targeting era using a simple learning rule," Working Papers 200904, University of Pretoria, Department of Economics.
    22. Stan du Plessis & Ben Smit & Federico Sturzenegger, 2008. "Identifying Aggregate Supply and Demand Shocks in South Africa †," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 17(5), pages 765-793, November.
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    Cited by:
    1. Eliphas Ndou & Nombulelo Gumata & Mthuli Ncube & Eric Olson, 2013. "Working Paper 189 - An Empirical Investigation of the Taylor Curve in South Africa," Working Paper Series 992, African Development Bank.
    2. Baaziz, Yosra & Labidi, Moez & Lahiani, Amine, 2013. "Does the South African Reserve Bank follow a nonlinear interest rate reaction function?," Economic Modelling, Elsevier, vol. 35(C), pages 272-282.

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