Taylor Visits Africa

Carlos Goncalves

No 2015/258, IMF Working Papers from International Monetary Fund

Abstract: Many low-income countries do not use interest rates as their main monetary policy instrument. In East Africa, for instance, targeting money aggregates has been pretty much the rule rather than the exception. Nevertheless, these targets are seldom met and often readjusted according to the economic environment. This opens up the possibility that central banks are de facto pursuing a strategy more akin to a Taylor Rule. Estimations of small-scale models for Kenya, Uganda and Tanzania suggest that these self-styled "monetary targeters" are respecting the Taylor Principle, that is are on average increasing nominal interest rates more than proportionally to inflation. Nevertheless, steep deviations from the Taylor Rule have taken place in Kenya and Tanzania. In Uganda, these errors are much smaller, in fact similar in size to Taylor Rule deviations found for Brazil. More surprisingly, they are smaller than South Africa’s, the continent’s sole long-term inflation targeter.

Keywords: WP; inflation deviation; interest rate equation; Neutral interest rates; central bank; inflation target; monetary policy tightness; interest rates instrument; deviations from the Taylor Rule; inflation goal; Inflation; Output gap; Interbank rates; Inflation targeting; Africa (search for similar items in EconPapers)
Pages: 19
Date: 2015-12-09
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