The Effectiveness of Monetary Policy in South Africa under Inflation Targeting: Evidence from a Time-Varying Factor-Augmented Vector Autoregressive Model

Goodness Aye (), Mehmet Balcilar and Rangan Gupta
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Goodness Aye: Department of Economics, University of Pretoria

No 201653, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper examines the transmission mechanism of shocks to monetary policy in South Africa using quarterly data from 1980:1 to 2012:4. We also in addition identify demand and supply shocks. Our analyses are based on a factor-augmented vector autoregression with time-varying coefficients and stochastic volatility (TVP-FAVAR), which allows us to simultaneously analyse the changing impulse responses of a set of 177 macroeconomic variables. Our results based on the impulse response functions, are consistent with economic theory as we observe no price puzzle that is often associated with the standard VAR models. We find evidence of modest time variation in the transmission of shocks. Overall, the macroeconomic variables seemed to have responded slightly more to the monetary policy shocks in the post -2000 (inflation targeting) sub-period than the pre-2000 period, albeit the differences in the effects are statistically insignificant. Demand shocks are found to have contributed more to changes in macroeconomic variables in South Africa than monetary policy and supply shocks. Our results suggest the need for a more efficient role of the monetary authority as this will both improve its credibility and greater economic stability.

Pages: 29 pages
Date: 2016
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: The Effectiveness Of Monetary Policy In South Africa Under Inflation Targeting: Evidence from a Time-Varying Factor-Augmented Vector Autoregressive Model (2020)
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