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Working Paper 134 - Inflation Targeting, Exchange Rate Shocks and Output: Evidence from South Africa


  • Mthuli Ncube


  • Eliphas Ndou


This paper derives the inflation equation to search for a possible transmission channel between the real interest rate, inflation rate, exchange rates, real output growth rate using a Bayesian VAR sign restriction approach. Our findings show that the real interest rate reacts negatively to inflation rate shocks and the Fisher effect holds in the long run. We show that strict inflation targeting approach is not compatible with significant real output growth. However a flexible inflation-targeting framework which attaches a large weight to the role of real effective exchange rates results in a significant real output growth given the Central Bank desire to accumulate more foreign exchange reserves and high oil price inflation. Thus real effective exchange rate measuring competitiveness against trading partners matters more than domestic currency and nominal effective exchange rate depreciations.

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  • Mthuli Ncube & Eliphas Ndou, 2011. "Working Paper 134 - Inflation Targeting, Exchange Rate Shocks and Output: Evidence from South Africa," Working Paper Series 324, African Development Bank.
  • Handle: RePEc:adb:adbwps:324

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    1. Calza, Alessandro & Monacelli, Tommaso & Stracca, Livio, 2006. "Mortgage markets, collateral constraints, and monetary policy: Do institutional factors matter?," CFS Working Paper Series 2007/10, Center for Financial Studies (CFS).
    2. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1329-1368.
    3. Christopher J. Mayer, 2002. "Monetary policy transmission to residential investment : commentary," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 159-161.
    4. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    5. Andrea Brischetto & Graham Voss, 1999. "A Structural Vector Autoregression Model of Monetary Policy in Australia," RBA Research Discussion Papers rdp1999-11, Reserve Bank of Australia.
    6. Jonathan McCarthy & Richard Peach, 2002. "Monetary policy transmission to residential investment," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 139-158.
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