Commitment, Loose Commitment or Discretion? Monetary Policy Preferences in South Africa

Christian Kakese Tipoy ()

ERSA Working Paper Series, 2025

Abstract: We analyse the objectives and policy preferences of the South African Reserve Bank using a structural model with external habits. Instead of the traditional Taylor rule, monetary policy is based on an optimal policy and the model incorporates switches in parameters and volatility of the structural shocks. Besides the polar cases of full commitment and discretion, the model is also estimated for the intermediate case of loose commitment using quarterly South African data from 1994Q1 to 2022Q2. We first compare the regime switching with a constant parameters model and find that the former fits the data better. The Bayesian estimation results indicate that the monetary preferences are better explained by a loose commitment with reoptimization occuring on average every 2 quarters. The reserve bank follows a flexible inflation targeting with inflation stability as the main goal followed by employment. We conduct some counterfactuals and find that with a full or a high level of commitment, the reserve bank would have achieved lower inflation volatility.

Keywords: Monetary policy; Optimal policy; Full commitment; Loose commitment; Discretion (search for similar items in EconPapers)
Date: 2025
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