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The formation of inflation expectations in South Africa

Author

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  • Nelene Ehlers
  • Rudi Steinbach

Abstract

A key factor in the inflation-targeting regime is the psychological process by which individuals and firms form their expectations of future inflation. From a monetary policy perspective, it is important to analyse this process, since under full rationality, only unexpected changes in inflation will affect real variables. In this paper, data from both the Bureau for Economic Researchs Inflation Expectations Survey and the Reuters Inflation Expectations Survey are evaluated, over different forecasting horizons to asses the characteristics of expectations formation across different economic groups in the South African economy. The results do not provide strong evidence to indicate that South African economic agents are exclusively rational or exclusively adaptive in formulating their inflation expectations. However, it appears that individuals employ some form of non-homogenous learning by combining some features of rationality with adaptive behaviour in order to minimise their forecast errors over time, subject to their respective available resources.

Suggested Citation

  • Nelene Ehlers & Rudi Steinbach, 2007. "The formation of inflation expectations in South Africa," Working Papers 3243, South African Reserve Bank.
    • Handle: RePEc:rbz:wpaper:3243
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    Citations

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    Cited by:

    1. Pierdzioch, Christian & Reid, Monique B. & Gupta, Rangan, 2016. "Forecasting the South African inflation rate: On asymmetric loss and forecast rationality," Economic Systems, Elsevier, vol. 40(1), pages 82-92.
    2. Christian Pierdzioch & Monique B. Reid & Rangan Gupta, 2018. "On the directional accuracy of inflation forecasts: evidence from South African survey data," Journal of Applied Statistics, Taylor & Francis Journals, vol. 45(5), pages 884-900, April.
    3. Monique B. Reid & Pierre L. Siklos, 2022. "How Firms and Experts View The Phillips Curve: Evidence from Individual and Aggregate Data from South Africa," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(12), pages 3355-3376, September.
    4. Lumengo Bonga-Bonga & Ntsakeseni Letitia Lebese, 2019. "Rethinking The Current Inflation Target Range In South Africa," Journal of Developing Areas, Tennessee State University, College of Business, vol. 53(2), pages 13-27, April-Jun.
    5. South African Reserve Bank, 2017. "Occasional Bulletin of Economic Notes 2017/02," Working Papers 7851, South African Reserve Bank.
    6. Pierdzioch, Christian & Reid, Monique B. & Gupta, Rangan, 2016. "Inflation forecasts and forecaster herding: Evidence from South African survey data," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 62(C), pages 42-50.
    7. Nyoni, Thabani, 2018. "Modeling and Forecasting Inflation in Zimbabwe: a Generalized Autoregressive Conditionally Heteroskedastic (GARCH) approach," MPRA Paper 88132, University Library of Munich, Germany.

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