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Has the SARB Become More Effective Post Inflation Targeting?

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Author Info

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Alain Kabundi

    ()
    (Department of Economics and Econometrics, University of Johannesburg)

  • Mampho P. Modise

    ()
    (Department of Economics, University of Pretoria and South African Treasury, Pretoria, South Africa)

Abstract

This paper assesses the impact of a monetary policy shock on 15 key macroeconomic variables of South Africa, in the pre- and post-inflation targeting periods. For this purpose, we use a Factor-Augmented Vector Autoregressive (FAVAR) model comprising of 107 monthly time series over two equal sub-samples of 1989:01-1997:12 and 2000:01-2008:12. The results, based on impulse response functions, are in line with economic theory and indicate no puzzling effects often observed with small-scale monetary Vector Autoregressive (VAR) models. More importantly, we find that the ability of monetary policy in affecting key macroeconomic variables, including inflation, has increased in the post-targeting period. But, majority of the effects are insignificant, which could, however, also be due to the shorter-lengths of the sub-samples relative to the number of variables used in this study, rather than depicting the inability of monetary policy to significantly affect the South African economy.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200925.

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Length: 18 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:pre:wpaper:200925

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Keywords: Monetary Policy Shock; Inflation Targeting; Impulse Response Functions; FAVAR;

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  1. Banbura, Marta & Giannone, Domenico & Reichlin, Lucrezia, 2007. "Bayesian VARs with Large Panels," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6326, C.E.P.R. Discussion Papers.
  2. Rangan Gupta & Alain Kabundi, 2010. "The effect of monetary policy on house price inflation: A factor augmented vector autoregression (FAVAR) approach," Journal of Economic Studies, Emerald Group Publishing, Emerald Group Publishing, vol. 37(6), pages 616-626, September.
  3. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(2), pages 147-62, April.
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  6. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series, Institute for Advanced Studies 10, Institute for Advanced Studies.
  7. Rangan Gupta & Marius Jurgilas & Alain Kabundi, 2009. "The Effect Of Monetary Policy On Real House Price Growth In South Africa: A Factor Augmented Vector Autoregression (Favar) Approach," Working Papers, University of Pretoria, Department of Economics 200905, University of Pretoria, Department of Economics.
  8. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  9. Marta Bańbura, 2008. "Large Bayesian VARs," 2008 Meeting Papers 334, Society for Economic Dynamics.
  10. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
  11. James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc.
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