Monetary Policy Instrument and Inflation in South Africa: Structural Vector Error Correction Model Approach

Lumengo Bonga-Bonga and Alain Kabundi ()

MPRA Paper from University Library of Munich, Germany

Abstract: Since the adoption of inflation rate targeting policy, there has been a great concern on the effectiveness of monetary policy to curb inflation in South Africa. The effectiveness of the repo rate as a policy instrument to control the level of inflation has been widely criticised not only in the South African context but also internationally. With the critics pointing out from a substantial lag for monetary policy changes to affect inflation to the inability of the policy instrument to effectively affect inflation level. In assessing the effectiveness of the monetary policy in South Africa, this paper makes use of the structural vector error correction model (SVECM) to characterise the dynamics of inflation to monetary policy shocks. The results of the impulse response function obtained from the SVECM found that while positive shocks to monetary policy decrease output but do not decrease credit demand and inflation in South Africa.

Keywords: Inflation rate targeting; Policy instruments; Structural Vector Error Correction Model. (search for similar items in EconPapers)
JEL-codes: C22 E52 (search for similar items in EconPapers)
Date: 2015-04-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:63731

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