The South African monetary policy and inflation targeting as a nominal anchor: Does the monetary policy become more effective?

Mohammed Umar, Jauhari Dahalan and Mukhriz Izraf Azman Aziz

International Journal of Monetary Economics and Finance, 2016, vol. 9, issue 4, 401-416

Abstract: This study investigates whether the South African inflation-targeting (IT) framework has performed the role of the nominal anchor and the process through which the monetary authority determines its instrument in the economy. The study employs generalised method of moments (GMM) estimators. The results of the post-IT adoption and full sample periods are characterised by forward-looking IT rule. Furthermore, the paper uses the augmented monetary policy rule to identify the factors that determine the monetary policy instrument for South Africa. The results confirm that the South African monetary economy practised full-fledged IT principle immediately after the adoption of the IT framework and the monetary policy rule serves as a nominal anchor for the economy. The policy implication is that for South Africa to continue keeping inflation to the required single-digit target, the Reserve Bank should further strengthen the IT framework adopted in the economy.

Keywords: baseline policy rule; forward-looking rule; GMM; generalised method of moments; inflation targeting; instrumental variables; Lagrange multiplier; monetary policy; nominal anchor; South Africa; structural breaks. (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijmefi:v:9:y:2016:i:4:p:401-416

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