Estimating Monetary Policy Rules for South Africa

Janine Aron () and John Muellbauer ()

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: South African monetary policy has experienced major shifts, with three broad monetary policy regimes since the 1960s. This paper analyses the conduct of monetary policy, describing the historical record and institutions of monetary policy, and formally modelling extended Taylor rules for interest rate policy formation. Our principal interest is in the second regime (prior to inflation targeting), when the short-term interest rate first became the main monetary policy instrument, with reference to monetary targets and an eclectic set of economic indicators. Policy was opaque in this regime, and has never been studied in the context of rigorous empirical models. Taylor rules, augmented for foreign interest rate influences and interest rate smoothing, and based either on forecast, or actual, inflation and output gap measures, poorly describe the behavior of the discount rate. A satisfactory model includes the deviation of money growth from target in the rule and controls for the extensive financial liberalisation occurring in the period. In practice, the central bank emphasized current inflation, giving a low weight to the output gap. We find weak evidence for structural breaks reflecting competing balance of payments considerations.

New Economics Papers: this item is included in nep-cba, nep-mon and nep-pke
Date: 2000-12
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Working Paper: Estimating Monetary Policy Rules for South Africa (2001)
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Persistent link: http://EconPapers.repec.org/RePEc:chb:bcchwp:89

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