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Financial markets and the response of monetary policy to uncertainty in South Africa

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  • Ruthira Naraidoo

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  • Leroi Raputsoane

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Abstract

This paper analyses the impact of uncertainty about the true state of the economy on monetary policy in South Africa since the adoption of inflation targeting. The paper uses an extended monetary policy rule that allows analysis of the impact of uncertainty about the conditions in financial markets on the interest rate setting behavior that describes the South African Reserve Bank’s monetary policy decisions. The results indicate that the effect of uncertainty on the interest rates has led to a more cautious monetary policy stance by the monetary authorities consistent with a large body of literature that recognizes that an excessively activist policy can increase economic instability. The results further show that uncertainty about the state of the economy clusters around the financial crisis periods in 2003 and from 2007 to 2009. The uncertainty about inflation was important to the interest rate setting behavior in 2003 and between 2007 and 2008, while the uncertainty about the conditions in financial markets was important to the interest rate setting behavior between 2008 and 2009. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Ruthira Naraidoo & Leroi Raputsoane, 2015. "Financial markets and the response of monetary policy to uncertainty in South Africa," Empirical Economics, Springer, vol. 49(1), pages 255-278, August.
  • Handle: RePEc:spr:empeco:v:49:y:2015:i:1:p:255-278 DOI: 10.1007/s00181-014-0866-y
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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, pages 117-135.
    2. Batiston Marques, Thales & Seixas dos Santos, Nelson, 2016. "Do Political News Affect Financial Market Returns? Evidences from Brazil," MPRA Paper 75530, University Library of Munich, Germany.
    3. Chesang, Laban K. & Naraidoo, Ruthira, 2016. "Parameter uncertainty and inflation dynamics in a model with asymmetric central bank preferences," Economic Modelling, Elsevier, vol. 56(C), pages 1-10.
    4. Goodness C. Aye & Mehmet Balcilar & Rangan Gupta, 2016. "The Effectiveness of Monetary Policy in South Africa under Inflation Targeting: Evidence from a Time-Varying Factor-Augmented Vector Autoregressive Model," Working Papers 201653, University of Pretoria, Department of Economics.
    5. Johannes Hermanus Kemp, 2015. "Measuring Potential Output for the South African Economy: Embedding Information About the Financial Cycle," South African Journal of Economics, Economic Society of South Africa, vol. 83(4), pages 549-568, December.
    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.

    More about this item

    Keywords

    Monetary policy; Uncertainty; Financial market conditions; C51; E43; E44; E58;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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