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

Ruthira Naraidoo and Leroi Raputsoane

Economic Modelling, 2011, vol. 28, issue 1, 251-258

Abstract: This paper estimates the optimal response of the SARB to deviations of inflation and output from their target values over the inflation targeting era. This is achieved using an empirical framework that allows the central bank's policy preferences to be zone-like and asymmetric. The first major finding is that the monetary authorities' response towards inflation is zone symmetric. That is, they react in a passive manner when inflation is within the target band whereas they become increasingly aggressive when it deviates from the target band. The monetary authorities also react with the same level of aggressiveness regardless of whether inflation overshoots or undershoots the inflation target band. The second major finding is that the monetary authorities' response to output fluctuations is asymmetric. That is, they react more aggressively to negative deviations of output from the potential so that they weigh business cycle recessions more than 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)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Journal Article: Optimal monetary policy reaction function in a model with target zones and asymmetric preferences for South Africa (2011)
Working Paper: Optimal monetary policy reaction function in a model with target zones and asymmetric preferences for South Africa (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:28:y:2011:i:1:p:251-258

DOI: 10.1016/j.econmod.2010.09.005

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