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Isolating a measure of inflation expectations for the South African financial market using forward interest rates

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  • Monique Reid

    ()
    (Department of Economics, University of Stellenbosch)

Abstract

The inflation expectations channel of the transmission mechanism is generally recognised as crucial for the implementation of modern monetary policy. This paper briefly reviews the practices commonly employed for measuring inflation expectations in South Africa and offers an additional method, which is market based. The methodologies of Nelson and Siegel (1987) and Svensson (1994) are applied to determine implied nominal and real forward interest rates. The difference between the nominal and real forward rates (called inflation compensation) on a particular day is then used as a proxy for the market’s inflation expectations. This measure should not be viewed as a substitute for other measures of inflation expectations, but should rather supplement these in order to offer an additional insight.

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File URL: http://www.ekon.sun.ac.za/wpapers/2009/wp092009/wp-09-2009.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 09/2009.

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Date of creation: 2009
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Handle: RePEc:sza:wpaper:wpapers81

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Keywords: South Africa; Inflation expectations; Monetary policy transmission mechanism; Implied forward rates; Term structure of interest rates;

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