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Zone‐Targeting Monetary Policy Preferences And Financial Market Conditions: A Flexible Non‐Linear Policy Reaction Function Of The Sarb Monetary Policy

  • Ruthira Naraidoo
  • Leroi Raputsoane

Based on a representation of policymaker’s preferences that capture inflation zone targeting behaviors, we estimate a flexible model of the monetary policy reaction function of the South African Reserve Bank (SARB). To address the current debate on the importance of financial asset prices in monetary policy decision making, we augment the analysis to allow for responses to financial market conditions over and above prices and output stabilisation. The main findings are that the monetary authorities’ response towards inflation is zone symmetric. Secondly, the monetary authorities’ response towards output is asymmetric with increased reaction during business cycle downturns versus upturns. Thirdly, the monetary authorities’ pay close attention to financial conditions index. They place the same weight on financial market booms and recessions so that their response is symmetric.

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Article provided by Economic Society of South Africa in its journal South African Journal of Economics.

Volume (Year): 78 (2010)
Issue (Month): 4 (December)
Pages: 400-417

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Handle: RePEc:bla:sajeco:v:78:y:2010:i:4:p:400-417
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