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Why Higher Trend Inflation Makes Monetary Policy More Costly in South Africa

Author

Listed:
  • Hylton Hollander

    (University of Cape Town)

  • Clinton Joel

    (National Treasury)

Abstract

Most inflation-targeting central banks target a small but positive underlying rate of inflation, often called trend inflation1. Yet its appropriate level remains uncertain. The extended deliberation in South Africa to move from a 3 - 6% target band to a 3% point target (with a ±1% tolerance band) illustrates this tension. In our working paper (Trend Inflation and the Costs of Price Dispersion in a Fiscal DSGE Model), we examine the role of trend inflation in an economy and argue that, all else equal, lower trend inflation is better for the economy.

Suggested Citation

  • Hylton Hollander & Clinton Joel, 2026. "Why Higher Trend Inflation Makes Monetary Policy More Costly in South Africa," ERSA Working Paper Series 275, Economic Research Southern Africa.
    • Handle: RePEc:rza:ersawp:275
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    File URL: https://ersawps.org/index.php/working-paper-series/article/view/275/177
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    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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