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Dynamic Time Inconsistency And The South African Reserve Bank

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  • Rangan Gupta
  • Josine Uwilingiye

Abstract

This paper derives the econometric restrictions imposed by the Barro and Gordon 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 January 1960‐April 1999, 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 January 2001‐February 2008, i.e. the period covering the starting point of the inflation‐targeting regime until date, we, on average, obtain lower rates of inflation. The result tends to suggest that the South African Reserve Bank perhaps needs to manage the inflation‐targeting framework better than it has done so far.

Suggested Citation

  • Rangan Gupta & Josine Uwilingiye, 2010. "Dynamic Time Inconsistency And The South African Reserve Bank," South African Journal of Economics, Economic Society of South Africa, vol. 78(1), pages 76-88, March.
    • Handle: RePEc:bla:sajeco:v:78:y:2010:i:1:p:76-88
    DOI: 10.1111/j.1813-6982.2010.01234.x
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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. Andrew Phiri, 2014. "Nonlinear Co-Integration Between Unemployment and Economic Growth in South Africa," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 12(4 (Winter), pages 303-324.
    3. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta, 2020. "The Effectiveness Of Monetary Policy In South Africa Under Inflation Targeting: Evidence from a Time-Varying Factor-Augmented Vector Autoregressive Model," Journal of Developing Areas, Tennessee State University, College of Business, vol. 54(4), pages 55-73, October-D.
    4. Gabriel Caldas Montes, 2014. "Can inflation targeting mitigate monetary policy time-inconsistency?," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 2(2), pages 15-25, April.
    5. Phiri, Andrew, 2014. "Re-evaluating Okun's law in South Africa: A nonlinear co-integration approach," MPRA Paper 57398, University Library of Munich, Germany.
    6. Amusa, Kafayat & Gupta, Rangan & Karolia, Shaakira & Simo-Kengne, Beatrice D., 2013. "The long-run impact of inflation in South Africa," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 798-812.

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