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Financial assets, linear and nonlinear policy rules: An in-sample assessment of the reaction function of the South African Reserve Bank

Author

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  • Ndahiriwe Kasaï
  • Ruthira Naraidoo

Abstract

Purpose - The purpose of this paper is to investigate how the South African Reserve Bank (SARB) sets monetary policy rate. Design/methodology/approach - Given the controversial debate on whether central banks should target asset prices for economic stability, the authors analyse whether the SARB policy-makers pay close attention to asset and financial markets in its policy decisions in the context of both linear and nonlinear Taylor type rule models of monetary policy. Findings - The main findings are that the nonlinear Taylor rule provides the best description of in-sample SARB interest rate setting behaviour as the financial crisis unfolds. The SARB policy-makers pay close attention to the financial conditions index when setting interest rates. The SARB's response of monetary policy to inflation is greater during business cycle recessions with not much weight on output and seems to place high importance on inflationary pressures of output during boom periods. The 2007-2009 financial crisis witnesses an overall decreased reaction to inflation, output and financial conditions amidst increased economic uncertainty. Originality/value - This paper introduces a financial condition index into a Taylor monetary policy rule and examines whether nonlinear models can provide additional information over a linear model.

Suggested Citation

  • Ndahiriwe Kasaï & Ruthira Naraidoo, 2012. "Financial assets, linear and nonlinear policy rules: An in-sample assessment of the reaction function of the South African Reserve Bank," Journal of Economic Studies, Emerald Group Publishing, vol. 39(2), pages 161-177, May.
  • Handle: RePEc:eme:jespps:v:39:y:2012:i:2:p:161-177
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    Citations

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    Cited by:

    1. Beatrice D. Simo - Kengne & Mehmet Balcilar & Rangan Gupta & Monique Reid & Goodness C. Aye, 2012. "Is the relationship between monetary policy and house prices asymmetric in South Africa? Evidence from a Markov-Switching Vector Autoregressive mode," Working Papers 15-26, Eastern Mediterranean University, Department of Economics.
    2. Kasai, Ndahiriwe & Naraidoo, Ruthira, 2011. "Evaluating the forecasting performance of linear and nonlinear monetary policy rules for South Africa," MPRA Paper 40699, University Library of Munich, Germany.
    3. Andrew Phiri, 2017. "Has the South African Reserve Bank responded to equity returns since the sub-prime crisis? An asymmetric convergence appraoch," Working Papers 1709, Department of Economics, Nelson Mandela University, revised Aug 2017.
    4. baaziz, yosra, 2016. "Les règles de Taylor à l’épreuve de la révolution : cas de l’Égypte
      [The Taylor rule to the test of the revolution: the case of Egypt]
      ," MPRA Paper 69779, University Library of Munich, Germany.
    5. Mehmet Balcilar & Rangan Gupta & Kevin Kotzé, 2017. "Forecasting South African macroeconomic variables with a Markov-switching small open-economy dynamic stochastic general equilibrium model," Empirical Economics, Springer, vol. 53(1), pages 117-135, August.
    6. Leroi RAPUTSOANE, 2015. "The lean versus clean debate and monetary policy in South Africa," Journal of Economics and Political Economy, KSP Journals, vol. 2(4), pages 467-480, December.

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