Optimal monetary policy reaction function in a model with target zones and asymmetric preferences for South Africa

Ruthira Naraidoo and Leroi Raputsoane

No 201004, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper estimates the optimal monetary authorities’ response to deviations of inflation and output from their target values for South Africa over the inflation targeting era. This is achieved using an empirical framework that allows the central bank’s policy preferences to be zone-like as well as asymmetric. The main findings are that the monetary authorities react in a passive manner when inflation is within the target band and become increasingly aggressive when it deviates from the target band and that they react with the same level of aggressiveness regardless whether inflation overshoots or undershoots the inflation target band, that is, the monetary authorities’ response towards inflation is zone symmetric. The second major finding shows that the monetary authorities’ response to output fluctuations is asymmetric such that they react more aggressively to negative deviations of output from the potential, therefore weighing more business cycle recessions versus expansions.

Keywords: monetary policy preferences; target zones; asymmetries (search for similar items in EconPapers)
JEL-codes: C51 C52 E52 E58 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2010-03
New Economics Papers: this item is included in nep-afr, nep-cba and nep-mon
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Journal Article: Optimal monetary policy reaction function in a model with target zones and asymmetric preferences for South Africa (2011)
Journal Article: Optimal monetary policy reaction function in a model with target zones and asymmetric preferences for South Africa (2011)
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