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Has the SARB become more effective post inflation targeting?

Author

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  • Rangan Gupta

    ()

  • Alain Kabundi

    ()

  • Mampho Modise

    ()

Abstract

This paper assesses the impact of a monetary policy shock on 15 key macroeconomic variables of South Africa, in the pre- and post-inflation targeting periods. For this purpose, we use a Factor-Augmented Vector Autoregressive (FAVAR) model comprising of 107 monthly time series over two equal sub-samples of 1989:01-1997:12 and 2000:01-2008:12. The results, based on impulse response functions, are in line with economic theory and indicate no puzzling effects often observed with small-scale monetary Vector Autoregressive (VAR) models. More importantly, we find that the ability of monetary policy in affecting key macroeconomic variables, including inflation, has increased in the post-targeting period. But, majority of the effects are insignificant, which could, however, also be due to the shorter-lengths of the sub-samples relative to the number of variables used in this study, rather than depicting the inability of monetary policy to significantly affect the South African economy.
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Suggested Citation

  • Rangan Gupta & Alain Kabundi & Mampho Modise, 2010. "Has the SARB become more effective post inflation targeting?," Economic Change and Restructuring, Springer, vol. 43(3), pages 187-204, August.
  • Handle: RePEc:kap:ecopln:v:43:y:2010:i:3:p:187-204
    DOI: 10.1007/s10644-009-9083-7
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    References listed on IDEAS

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    1. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
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    4. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    5. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
    6. Rangan Gupta & Alain Kabundi, 2010. "The effect of monetary policy on house price inflation: A factor augmented vector autoregression (FAVAR) approach," Journal of Economic Studies, Emerald Group Publishing, vol. 37(6), pages 616-626, November.
    7. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
    8. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-162, April.
    9. James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc.
    10. Gupta, Rangan & Jurgilas, Marius & Kabundi, Alain, 2010. "The effect of monetary policy on real house price growth in South Africa: A factor-augmented vector autoregression (FAVAR) approach," Economic Modelling, Elsevier, vol. 27(1), pages 315-323, January.
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    Citations

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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. Giorgio Canarella & Stephen Miller, 2016. "Inflation persistence and structural breaks: the experience of inflation targeting countries and the US," Journal of Economic Studies, Emerald Group Publishing, vol. 43(6), pages 980-1005, November.
    3. Kabundi, Alain & Schaling, Eric & Some, Modeste, 2015. "Monetary policy and heterogeneous inflation expectations in South Africa," Economic Modelling, Elsevier, vol. 45(C), pages 109-117.
    4. Ruthira Naraidoo & Leroi Raputsoane, 2010. "Zone‐Targeting Monetary Policy Preferences And Financial Market Conditions: A Flexible Non‐Linear Policy Reaction Function Of The Sarb Monetary Policy," South African Journal of Economics, Economic Society of South Africa, vol. 78(4), pages 400-417, December.
    5. Balcilar, Mehmet & Gupta, Rangan & Kotzé, Kevin, 2015. "Forecasting macroeconomic data for an emerging market with a nonlinear DSGE model," Economic Modelling, Elsevier, vol. 44(C), pages 215-228.
    6. Davide Debortoli & Ricardo Nunes, 2014. "Monetary Regime Switches and Central Bank Preferences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(8), pages 1591-1626, December.
    7. Alain Kabundi & Elsabé Loots, 2010. "Patterns Of Co‐Movement Between South Africa And Germany: Evidence From The Period 1985 To 2006," South African Journal of Economics, Economic Society of South Africa, vol. 78(4), pages 383-399, December.

    More about this item

    Keywords

    Monetary policy shock; Inflation targeting; Impulse response functions; FAVAR; C32; E52; E58;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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