Working Paper 134 - Inflation Targeting, Exchange Rate Shocks and Output: Evidence from South Africa

Mthuli Ncube () and Eliphas Ndou

Working Paper Series from African Development Bank

Abstract: This paper derives the inflation equation to search for a possible transmission channel between the real interest rate, inflation rate, exchange rates, real output growth rate using a Bayesian VAR sign restriction approach. Our findings show that the real interest rate reacts negatively to inflation rate shocks and the Fisher effect holds in the long run. We show that strict inflation targeting approach is not compatible with significant real output growth. However a flexible inflation-targeting framework which attaches a large weight to the role of real effective exchange rates results in a significant real output growth given the Central Bank desire to accumulate more foreign exchange reserves and high oil price inflation. Thus real effective exchange rate measuring competitiveness against trading partners matters more than domestic currency and nominal effective exchange rate depreciations.

Date: 2011-08-11
New Economics Papers: this item is included in nep-afr, nep-cba, nep-ifn, nep-mac and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.afdb.org/fileadmin/uploads/afdb/Docume ... uth%20Africa%20A.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:adb:adbwps:324

Access Statistics for this paper

More papers in Working Paper Series from African Development Bank African Development Bank Group, Avenue Joseph Anoma, 01 BP 1387 Abidjan 01, Côte d'Ivoire. Contact information at EDIRC.
Bibliographic data for series maintained by Adeleke Oluwole Salami ().