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Monetary Policy, Macro-stability and Growth

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Abstract

There is greater appreciation now amongst economists of the negative effect of uncertainty on investment, growth and equality, especially when credit constraints are widespread. This implies an important linkage between the transparency and predictability of the policy environment, and growth and equality. The paper begins with a literature survey on the inflation and inflation volatility link, the uncertainty and investment link and the inflation volatility and growth link. This framework is used to examine the experience of South Africa’s new monetary policy regime (inflation targeting, IT) in achieving greater macrostability. South Africa is an interesting case study, being one of the more advanced of the emerging markets with its deep and sophisticated financial system, and yet with around 35 percent unemployment and a legacy of developmental problems from the Apartheid era. The authors demonstrate using evidence from three sources of micro-data that the new monetary regime is more credible, transparent and predictable. They examine the performance of monetary policy and argue IT has not resulted in real interest rate levels that are a hindrance to growth. They explore the better response under IT to big external shocks like exchange rate depreciation, as compared with the monetary regime prior to IT. The paradox is examined of success in achieving macro-stability, where greater household acquisition of debt and increased demand is both inflationary and limits saving, hence constraining corporate investment. The paper concludes with lessons from South Africa’s recent successful monetary policy experience for other emerging market countries and for less developed countries’ central banks e.g., in Africa.

Suggested Citation

  • Janine Aron & John Muellbauer, 2005. "Monetary Policy, Macro-stability and Growth," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 6(4), pages 123-147, October.
  • Handle: RePEc:wej:wldecn:225
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    6. Wintrobe,Ronald, 1998. "The Political Economy of Dictatorship," Cambridge Books, Cambridge University Press, number 9780521583299, March.
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    1. Janine Aron & John Muellbauer, 2007. "Review of Monetary Policy in South Africa since 1994," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 16(5), pages 705-744, November.
    2. Janine Aron & John Muellbauer, 2009. "Monetary Policy and Inflation Modeling in a More Open Economy in South Africa," Chapters,in: Monetary Policy Frameworks for Emerging Markets, chapter 15 Edward Elgar Publishing.
    3. Stan Du plessis & Ben Smit & Federico Sturzenegger, 2007. "The Cyclicality Of Monetary And Fiscal Policy In South Africa Since 1994," South African Journal of Economics, Economic Society of South Africa, vol. 75(3), pages 391-411, September.
    4. Janine Aron & John Muellbauer, 2009. "Some Issues in Modeling and Forecasting Inflation in South Africa," CSAE Working Paper Series 2009-01, Centre for the Study of African Economies, University of Oxford.
    5. Aron, Janine & Muellbauer, John, 2006. "Review of Monetary Policy in South Africa: 1994-2004," CEPR Discussion Papers 5831, C.E.P.R. Discussion Papers.
    6. Aron, Janine & Muellbauer, John & Murphy, Anthony, 2006. "Housing wealth, credit conditions and consumption," MPRA Paper 24485, University Library of Munich, Germany.
    7. Janine Aron & John Muellbauer, 2009. "Monetary Policy and Inflation Modeling in a More Open Economy in South Africa," Chapters,in: Monetary Policy Frameworks for Emerging Markets, chapter 15 Edward Elgar Publishing.

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