Should the SARB Have Stayed Time Inconsistent?
AbstractThis paper derives the econometric restrictions imposed by the Barro and Gordon (1983) model of dynamic time inconsistency on a bivariate time-series model of Consumer Price Index (CPI) inflation and real Gross Domestic Product (GDP), and tests these restrictions based on quarterly data for South Africa covering the period of 1960:01 through 1999:04, i.e., for the pre-inflation targeting period. The results show that the data are consistent with the short- and long-run implications of the theory of time-consistent monetary policy. Moreover, when the model is used to forecast one-step-ahead inflation over the period of 2001:01 to 2008:02, i.e., the period covering the starting point of the inflation targeting regime till date we, on average, obtain lower rates of inflation. The result tends to suggest that the South African Reserve Bank (SARB), perhaps needs to manage the inflation targeting framework better than it has done so far.
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Bibliographic InfoPaper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200833.
Length: 15 pages
Date of creation: Oct 2008
Date of revision:
Dynamic Time Inconsistency; Inflation Targeting; One-Step-Ahead Forecasts;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-21 (All new papers)
- NEP-CBA-2008-10-21 (Central Banking)
- NEP-FOR-2008-10-21 (Forecasting)
- NEP-MAC-2008-10-21 (Macroeconomics)
- NEP-MON-2008-10-21 (Monetary Economics)
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