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Does monetary policy react asymmetrically to exchange rate misalignments? Evidence for South Africa

Lebogang Mateane () and Christian Proaño
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Lebogang Mateane: University of Cape Town

Empirical Economics, 2020, vol. 58, issue 4, No 6, 1639-1658

Abstract: Abstract This paper examines the impact of exchange rates on the monetary policy conduct of South Africa’s central bank (SARB). We also examine whether the SARB’s responses depend on whether South Africa’s exchange rate is undervalued or not. To investigate these questions, we incorporate a real exchange rate misalignment term into a forward-looking Taylor-type policy rule. We find empirical evidence supporting the hypothesis that the SARB responds asymmetrically to undervalued real exchange rates. Finally, a general result is that the SARB allocates more weight towards expected inflation stabilization, a lower weight towards output gap stabilization and the lowest weight towards the exchange rate.

Keywords: Monetary policy rules; Exchange rates; GMM estimation (search for similar items in EconPapers)
JEL-codes: E4 E5 F4 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s00181-018-1595-4

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