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Inflation and output forecasts for South Africa: monetary transmission implications

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  • Janine Aron
  • John Muellbauer

Abstract

South Africa’s recent adoption of inflation targeting increases the need for good forecasting models of inflation and models for understanding the monetary transmission mechanism. This paper presents multi-step models for inflation and output, four-quarters ahead. The inflation model has an equilibrium correction form, which clarifies medium- or longer-run influences on inflation, including opening the economy to foreign imports. The model confirms the importance of the output gap and the exchange rate for forecasting inflation; and the influence from recent changes in the current account surplus to GDP ratio, which is also sensitive to short-term interest rates. However, a rise in interest rates can also raise inflation in the short-run, via a rise in mortgage interest payments (a component of the consumer price index). The unfortunate policy implications for South Africa are discussed. The output model uses a stochastic trend to measure long-run changes in the capacity to produce. On the demand side there are important negative interest rate effects, though these have been altered by changes in the monetary policy regime. The trade surplus and government surplus to GDP ratios, which also respond to interest rate changes, and improvements in the terms-of-trade, all have a positive effect on future output.

Suggested Citation

  • Janine Aron & John Muellbauer, 2000. "Inflation and output forecasts for South Africa: monetary transmission implications," CSAE Working Paper Series 2000-23, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:2000-23
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    File URL: http://www.csae.ox.ac.uk/materials/papers/20-23text.pdf
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    References listed on IDEAS

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    1. Oriana Bandiera & Gerard Caprio & Patrick Honohan & Fabio Schiantarelli, 2000. "Does Financial Reform Raise or Reduce Saving?," The Review of Economics and Statistics, MIT Press, pages 239-263.
    2. Janine Aron & John Muellbauer, 2000. "Personal and Corporate Saving in South Africa," World Bank Economic Review, World Bank Group, pages 509-544.
    3. Gordon De Brouwer & Neil R. Ericsson, 1995. "Modelling inflation in Australia," International Finance Discussion Papers 530, Board of Governors of the Federal Reserve System (U.S.).
    4. de Brouwer, Gordon & Ericsson, Neil R, 1998. "Modeling Inflation in Australia," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 433-449, October.
    5. Clements, Michael P & Hendry, David F, 1996. "Multi-step Estimation for Forecasting," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, pages 657-684.
    6. Weiss, Andrew A., 1991. "Multi-step estimation and forecasting in dynamic models," Journal of Econometrics, Elsevier, pages 135-149.
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    Cited by:

    1. Janine Aron & John Muellbauer, 2002. "Interest Rate Effects on Output: Evidence from a GDP Forecasting Model for South Africa," IMF Staff Papers, Palgrave Macmillan, vol. 49(Special i), pages 185-213.
    2. Rolf Strauch & Mark Hallerberg & Jürgen von Hagen, 2004. "Budgetary Forecasts in Europe – The Track Record of Stability and Convergence Programmes," Economic Working Papers at Centro de Estudios Andaluces E2004/42, Centro de Estudios Andaluces.
    3. Christopher Bowdler & Eilev S. Jansen, 2004. "Testing for a time-varying price-cost markup in the Euro area inflation process," Economics Papers 2004-W10, Economics Group, Nuffield College, University of Oxford.
    4. Janine Aron & John Muellbauer & Coen Pretorius, 2004. "A Framework for Forecasting the Components of the Consumer Price," Development and Comp Systems 0409054, EconWPA.
    5. Christopher Bowdler & Luca Nunziata, 2004. "A note on the determinants of inflation starts in the OECD," Economics Papers 2004-W11, Economics Group, Nuffield College, University of Oxford.
    6. Christopher Bowdler & Adeel Malik, 2005. "Openness and inflation volatility: Cross-country evidence," Economics Papers 2005-W14, Economics Group, Nuffield College, University of Oxford.
    7. Christopher Bowdler, 2003. "Openness and the Output-Inflation Tradeoff," Economics Papers 2003-W04, Economics Group, Nuffield College, University of Oxford.

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