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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.

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  • 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 & Rene頖an 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. Mai, Nhat Chi, 2014. "Monetary transmission mechanism analysis in a small, open economy: the case of Vietnam," OSF Preprints ybc8p, Center for Open Science.
    3. Oatlhotse Madito & Nicholas M. Odhiambo, 2018. "The Main Determinants Of Inflation In South Africa: An Empirical Investigation," Organizations and Markets in Emerging Economies, Faculty of Economics, Vilnius University, vol. 9(2).
    4. Thi Mai Lan Nguyen, 2020. "Output Effects of Monetary Policy in Emerging and Developing Countries: Evidence from a Meta-Analysis," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(1), pages 68-85, January.

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    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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