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Monetary Policy and Heterogeneous Inflation Expectations in South Africa

Author

Listed:
  • Alain Kabundi
  • Eric Schaling
  • Modeste Some

Abstract

This paper examines the relationship between inflation and inflation expectations of analysts, business, and trade unions in South Africa during the inflation targeting (IT) regime. We consider inflation expectations based on the Bureau of Economic Research (BER) quarterly survey observed from 2000Q1 to 2013Q1. We estimate inflation expectations of individual agents as the weighted average of lagged inflation and the inflation target. The results indicate that expectations are heterogeneous across agents. Expectations of price setters (business and unions) are closely related to each other and are higher than the upper bound of the official target band, while expectations of analysts are within the target band. In addition, expectations of price setters are somewhat related to lagged inflation and the opposite is true for analysts. The results reveal that the SARB has successfully anchored expectations of analysts but that price setters have not sufficiently used the focal point implicit in the inflation targeting regime. The implication is that the SARB may be pushed to accommodate private agents’ expectations.

Suggested Citation

  • Alain Kabundi & Eric Schaling & Modeste Some, 2014. "Monetary Policy and Heterogeneous Inflation Expectations in South Africa," Working Papers 6107, South African Reserve Bank.
  • Handle: RePEc:rbz:wpaper:6107
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    References listed on IDEAS

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    Cited by:

    1. Sumru Altug & Cem Cakmakli, 2014. "Inflation Targeting and Inflation Expectations: Evidence for Brazil and Turkey," Koç University-TUSIAD Economic Research Forum Working Papers 1413, Koc University-TUSIAD Economic Research Forum.
    2. Johannes Fedderke & Yang Liu, 2018. "Inflation in South Africa: An Assessment of Alternative Inflation Models," South African Journal of Economics, Economic Society of South Africa, vol. 86(2), pages 197-230, June.
    3. Tomasz Łyziak & Maritta Paloviita, 2017. "Formation of inflation expectations in turbulent times. Recent evidence from the European Survey of Professional Forecasters," NBP Working Papers 261, Narodowy Bank Polski, Economic Research Department.
    4. M. Ayhan Kose & Hideaki Matsuoka & Ugo Panizza & Dana Vorisek, 2019. "Inflation Expectations: Review and Evidence," Koç University-TUSIAD Economic Research Forum Working Papers 1904, Koc University-TUSIAD Economic Research Forum.
    5. Christian Pierdzioch & Monique B. Reid & Rangan Gupta, 2018. "On the directional accuracy of inflation forecasts: evidence from South African survey data," Journal of Applied Statistics, Taylor & Francis Journals, vol. 45(5), pages 884-900, April.
    6. Vincent Dadam & Nicola Viegi, 2015. "Labour Market and Monetary Policy in South Africa," Working Papers 201569, University of Pretoria, Department of Economics.
    7. Miah, Fazlul & Khalifa, Ahmed Ali & Hammoudeh, Shawkat, 2016. "Further evidence on the rationality of interest rate expectations: A comprehensive study of developed and emerging economies," Economic Modelling, Elsevier, vol. 54(C), pages 574-590.
    8. Łyziak, Tomasz & Paloviita, Maritta, 2017. "Formation of inflation expectations in turbulent times : Can ECB manage inflation expectations of professional forecasters?," Research Discussion Papers 13/2017, Bank of Finland.
    9. Pierdzioch, Christian & Reid, Monique B. & Gupta, Rangan, 2016. "Inflation forecasts and forecaster herding: Evidence from South African survey data," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 62(C), pages 42-50.
    10. repec:eee:ecmode:v:72:y:2018:i:c:p:132-139 is not listed on IDEAS
    11. Xu, Kun & Cheng, Jian-hua & Xu, Wenli, 2016. "通胀及通胀预期冲击的动态特征分析
      [Study on Dynamics of Inflation and Inflation Expectation Shocks in China]
      ," MPRA Paper 71977, University Library of Munich, Germany.
    12. South African Reserve Bank, 2017. "Occasional Bulletin of Economic Notes 2017/02," Working Papers 7851, South African Reserve Bank.
    13. Zheng, Min & Wang, Hefei & Wang, Chengzhang & Wang, Shouyang, 2017. "Speculative behavior in a housing market: Boom and bust," Economic Modelling, Elsevier, vol. 61(C), pages 50-64.
    14. Xu, Yingying & Chang, Hsu-Ling & Lobonţ, Oana-Ramona & Su, Chi-Wei, 2016. "Modeling heterogeneous inflation expectations: empirical evidence from demographic data?," Economic Modelling, Elsevier, vol. 57(C), pages 153-163.

    More about this item

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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