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The Sensitivity of South African Inflation Expectations to Surprises

The maintenance of price stability is widely recognised as the primary goal of modern monetary policy, and the management of private sector inflation expectations has become an essential channel through which this goal is achieved. This evaluation aims to improve the understanding of how the sensitivity of private sector inflation expectations to macroeconomic surprises in South Africa compares internationally, as this provides an indication of the contribution of monetary policy in South Africa to anchoring inflation expectations. If a central bank is credible, the financial markets should react less sensitively to macroeconomics surprises, because they trust the central bank to manage these incidents and achieve the objectives they communicated over the medium to long term. In this paper, the methodology of Gurkaynack, Sack and Swanson (2005a) is adopted in order to measure the sensitivity of South African inflation expectations to surprises. A comparison of South Africa’s results with those of countries in the original studies supports the contention that the SARB (South African Reserve Bank) has encouraged private sector inflation expectations to be relatively insensitive to macroeconomic surprises, and it offers further support to the argument that the inflation targeting framework facilitates the anchoring of inflation expectations.

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Paper provided by Economic Research Southern Africa in its series Working Papers with number 131.

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Date of creation: 2009
Date of revision:
Handle: RePEc:rza:wpaper:131
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