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Should The South African Reserve Bank Respond To Exchange Rate Fluctuations? Evidence From The Cosine-Squared Cepstrum

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  • Rangan Gupta

    () (Department of Economics, University of Pretoria)

Abstract

Empirical evidence on the whether the inflation-targeting South African Reserve Bank (SARB) should also consider responding to exchange rate fluctuations, are contradictory. Against this backdrop of contradictory evidence, we revisit the issue by questioning if the inflation rate is more volatile than it would have been had South Africa not moved to a flexible exchange rate regime in 1995, using the cosine-squared cepstrum. We find that the CPI inflation in South Africa has become more volatile since the second quarter of 1995, post a flexible exchange rate regime, than it would have been had the country continued to pursue a fixed exchange rate policy. Based on this result, we can conclude that the SARB should perhaps respond to exchange rate fluctuations, however, we also warn against the cost of increased volatility in output that is likely to result from targeting exchange rate variability.

Suggested Citation

  • Rangan Gupta, 2012. "Should The South African Reserve Bank Respond To Exchange Rate Fluctuations? Evidence From The Cosine-Squared Cepstrum," Working Papers 201201, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201201
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    Keywords

    Cosine-Squared Cepstrum; Exchange Rate Regime; Inflation Targeting; Inflation Volatility; Output Volatility; Saphe Cracking;

    JEL classification:

    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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