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The opportunistic approach to monetary policy and financial market conditions

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  • Ndahiriwe Kasa
  • Ruthira Naraidoo

Abstract

We test the concept of the opportunistic approach to monetary policy in South Africa post-2000 inflation targeting regime. The article contributes to the current debate on central banks having additional objectives over and above inflation and output by incorporating a measure of financial conditions in the modelling framework. Our findings support the two features of the opportunistic approach. First, we find that the models that include an intermediate target that reflects the recent history of inflation rather than simple inflation target improve the fit of the models. Second, the data supports the view that the South African Reserve Bank (SARB) behaves with some degree of nonresponsiveness when inflation is within the zone of discretion but react aggressively otherwise. Recursive estimates from our preferred model reveal that overall there has been a subdued reaction to inflation, output and financial conditions amidst the increased economic uncertainty of the 2007--2009 financial crisis.

Suggested Citation

  • Ndahiriwe Kasa & Ruthira Naraidoo, 2013. "The opportunistic approach to monetary policy and financial market conditions," Applied Economics, Taylor & Francis Journals, vol. 45(18), pages 2537-2545, June.
    • Handle: RePEc:taf:applec:v:45:y:2013:i:18:p:2537-2545
    DOI: 10.1080/00036846.2012.669464
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    References listed on IDEAS

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    1. Kasai Ndahiriwe & Ruthira Naraidoo, 2011. "The Opportunistic approach to monetary policy and financial markets," Working Papers 201103, University of Pretoria, Department of Economics.
    2. Mishkin, F S., 2008. "How should we respond to asset price bubbles?," Financial Stability Review, Banque de France, issue 12, pages 65-74, October.
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    Cited by:

    1. Mehmet Balcilar & Rangan Gupta & Theshne Kisten, 2020. "The Impact of Uncertainty Shocks in South Africa: The Role of Financial Regimes," Working Papers 202046, University of Pretoria, Department of Economics.
    2. 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.
    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. Theshne Kisten, 2019. "A financial stress index for South Africa: A time-varying correlation approach," Working Papers 805, Economic Research Southern Africa.
    5. Saad Ahmad, 2020. "Identifying a robust policy rule for the Fed's response to financial stress," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(4), pages 565-578, October.
    6. 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.

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