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Estimating Monetary Policy Rules for South Africa

  • Janine Aron
  • John Muellbauer

South African monetary policy has experienced major shifts, with three broad monetary policy regimes since the 1960s. This paper analyses the conduct of monetary policy, describing the historical record and institutions of monetary policy, and formally modelling extended Taylor rules for interest rate policy formation. Our principal interest is in the second regime (prior to inflation targeting), when the short-term interest rate first became the main monetary policy instrument, with reference to monetary targets and an eclectic set of economic indicators. Policy was opaque in this regime, and has never been studied in the context of rigorous empirical models. Taylor rules, augmented for foreign interest rate influences and interest rate smoothing, and based either on forecast, or actual, inflation and output gap measures, poorly describe the behavior of the discount rate. A satisfactory model includes the deviation of money growth from target in the rule and controls for the extensive financial liberalisation occurring in the period. In practice, the central bank emphasized current inflation, giving a low weight to the output gap. We find weak evidence for structural breaks reflecting competing balance of payments considerations.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 89.

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Date of creation: Dec 2000
Date of revision:
Handle: RePEc:chb:bcchwp:89
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  1. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
  2. Hendry, David F, 1985. "Monetary Economic Myth and Econometric Reality," Oxford Review of Economic Policy, Oxford University Press, vol. 1(1), pages 72-84, Spring.
  3. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
  4. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc.
  5. John B. Taylor, 1995. "The monetary transmission mechanism: an empirical framework," Working Papers in Applied Economic Theory 95-07, Federal Reserve Bank of San Francisco.
  6. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  7. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Working Papers 6570, National Bureau of Economic Research, Inc.
  8. Muellbauer, John N J, 1996. "Income Persistence and Macro-Policy Feedbacks in the U.S," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(4), pages 703-33, November.
  9. Harvey, A C & Jaeger, A, 1993. "Detrending, Stylized Facts and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(3), pages 231-47, July-Sept.
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