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Monetary policy and inflation in South Africa: A VECM augmented with foreign variables

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  • Annari Waal
  • Reneé Eyden

Abstract

We develop a structural cointegrated vector autoregressive (VAR) model with weakly exogenous foreign variables, known as an augmented VECM or VECX , suitable for a small open economy like South Africa. This model is novel for South Africa in two ways: it is the first VECX developed to analyse monetary policy and the first model that uses time-varying trade weights to create the foreign series. We impose three significant long-run relations (augmented purchasing power parity, uncovered interest parity and Fisher parity) to investigate the effect of a monetary policy shock on inflation. The results suggest the effective transmission of monetary policy.

Suggested Citation

  • Annari Waal & Reneé Eyden, 2014. "Monetary policy and inflation in South Africa: A VECM augmented with foreign variables," South African Journal of Economics, Economic Society of South Africa, vol. 82(1), pages 117-140, March.
  • Handle: RePEc:bla:sajeco:v:82:y:2014:i:1:p:117-140
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    File URL: http://hdl.handle.net/10.1111/saje.12027
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    Cited by:

    1. Annari De Waal & Reneé Van Eyden & Rangan Gupta, 2015. "Do we need a global VAR model to forecast inflation and output in South Africa?," Applied Economics, Taylor & Francis Journals, vol. 47(25), pages 2649-2670, May.
    2. repec:vul:omefvu:v:9:y:2018:i:2:id:251 is not listed on IDEAS

    More about this item

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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