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Modelling monetary policy in South Africa: Focus on inflation targeting era using a simple learning rule

  • Ruthira Naraidoo

    ()

    (Department of Economics, University of Pretoria)

  • Rangan Gupta

    ()

    (Department of Economics, University of Pretoria)

A simple empirical nonlinear framework is used to analyse monetary policy between 1983 and 2007 in South Africa, focusing on the policy of in?ation targeting introduced in Feb 2000, more precisely when the South African Reserve Bank (SARB) announced that an inflation zone targeting regime of 3-6% would be in place. We find that a model specification embodying a simple inflation learning rule for the future inflation rate seems to provide a better understanding of the decision process made by the SARB in its interest rate setting policy. The main findings are that the adoption of inflation targeting led to significant changes in monetary policy, secondly, post-2000 monetary policy is asymmetric as policy-makers respond more to downward deviation of inflation away from the target, thirdly, post-2000 policy-makers may be attempting to keep inflation within the 4.5%-6.9% range rather than pursuing a target zone of 3-6% as generally pre- announced and fourthly, the response of monetary policy to in?ation is nonlinear as interest rates respond more when inflation is further from the target.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 200904.

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Length: 14 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:pre:wpaper:200904
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Web page: http://www.up.ac.za/economics

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